10-K 1 d10k.htm FORM 10-K Form 10-K

 


 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 

x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

           For   the fiscal year ended December 31, 2002

 

OR

 

¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

           For   the transition period from _________________ to ___________________

 

Commission file number 0-3658

 


 

THE FIRST AMERICAN CORPORATION

(Exact name of registrant as specified in its charter)

 

Incorporated in California

 

95-1068610

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

1 First American Way, Santa Ana, California 92707-5913

(Address of principal executive offices) (Zip Code)

 

(714) 800-3000

Registrant’s telephone number, including area code

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

Common

 

New York Stock Exchange

Rights to Purchase Series A Junior

Participating Preferred

 

New York Stock Exchange

(Title of each class)

 

(Name of each exchange on which registered)

 

Securities registered pursuant to Section 12(g) of the Act:

 

None

 


 

Indicate by check mark whether registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 C.F.R. § 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

 

Indicate by check mark if the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No  ¨

 

On March 25, 2003, the aggregate market value of voting stock held by non-affiliates was $1,663,201,235.

 

On March 25, 2003, there were 75,919,821 shares of Common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive proxy statement are incorporated by reference in Part III of this report. The definitive proxy statement will be filed no later than 120 days after the close of Registrant’s fiscal year.

 

This report includes 78 pages.

 



 

PART I

 

Item 1.    Business.

 

The Company

 

The First American Corporation (the Company) was organized in 1894 as Orange County Title Company, succeeding to the business of two title abstract companies founded in 1889 and operating in Orange County, California. In 1924, the Company commenced issuing title insurance policies. In 1986, the Company began a diversification program by acquiring and developing business information companies closely related to the real estate transfer and closing process. In 1998, the Company expanded its diversification program to include business information companies outside of the real estate transfer and closing process. The Company is a California corporation and has its executive offices at 1 First American Way, Santa Ana, California 92707-5913. The Company’s website address is www. firstam.com and includes our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, shareholder proxy statements, and any amendments to those reports. Each of these reports is available free of charge on our website as soon as reasonably practicable. The Company’s telephone number is (714) 800-3000. Unless the context otherwise indicates, the “Company,” as used herein, refers to The First American Corporation and its subsidiaries.

 

General

 

The First American Corporation (the Company), through its subsidiaries, is engaged in the business of providing business information and related products and services. The Company has seven reporting segments that fall within two primary business groups, financial services and information technology. The financial services group includes title insurance, specialty insurance and trust and other services. The title insurance segment issues residential and commercial title insurance policies, provides escrow services, equity loan services, tax-deferred exchanges and other related products. The specialty insurance segment issues property and casualty insurance policies and provides home warranties. The trust and other services segment provides investment advisory and trust and thrift services. The information technology group includes mortgage information, property information, credit information, and screening information. The mortgage information segment provides tax monitoring, flood certification, default management services, mortgage loan servicing systems, mortgage document preparation and other real estate related services. The property information segment provides property database services and appraisal services. The credit information segment provides mortgage credit and specialized credit reporting services. The screening information segment provides tenant screening, employee background screening, occupational health services and motor vehicle reporting. Financial information regarding each of the Company’s business segments is included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” of Part II of this report.

 

The Company believes that it holds the number one market share position for many of its products and services, including but not limited to, flood zone determinations, based on the number of flood zone determination reports issued; mortgage credit reporting services, based on the number of credit reports issued; automotive credit reporting services, based on the number of credit reports issued; default management services, based on the number of foreclosure/bankruptcy cases reported; property database services, based on the number of inquiries; and resident screening, based on the number of reports issued. The Company also believes that it holds the number two market share position for title insurance, based on operating revenues; tax monitoring services, based on the number of loans under service; home warranty services, based on the number of home protection contracts under service; and occupational health services, based on the number of drug test reports issued.

 

Substantially all of the revenues for the Company’s title insurance and mortgage information segments result from resales and refinancings of residential real estate and, to a lesser extent, from commercial transactions

 

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and the construction and sale of new housing. Over one-half of the revenues in the Company’s property information and credit information segments also depend on real estate activity. The remaining portion of the property information and credit information revenues, as well as the revenues for the Company’s specialty insurance, trust and other services, and screening information segments are isolated from the volatility of real estate transactions. Real estate activity is cyclical in nature and is affected greatly by the cost and availability of long-term mortgage funds. Real estate activity and, in turn, a large portion of the Company’s revenue base, can be adversely affected during periods of high interest rates and/or limited money supply. However, this adverse effect is mitigated in part by the continuing diversification of the Company’s operations into areas outside of the traditional real estate transfer and closing process.

 

The Financial Services Group

 

Title Insurance Segment

 

Overview of Title Insurance Industry

 

Title to, and the priority of interests in, real estate are determined in accordance with applicable laws. In most real estate transactions, mortgage lenders and purchasers of real estate want to be protected from loss or damage in the event that title is not as represented. In most parts of the United States, title insurance has become accepted as the most efficient means of providing such protection.

 

Title Policies.    Title insurance policies insure the interests of owners and their lenders in the title to real property against loss by reason of adverse claims to ownership of, or to defects, liens, encumbrances or other matters affecting such title which exist at the time a title insurance policy is issued and which were not excluded from the coverage of a title insurance policy. Title insurance policies are issued on the basis of a title report, which is prepared after a search of the public records, maps, documents and prior title policies to ascertain the existence of easements, restrictions, rights of way, conditions, encumbrances or other matters affecting the title to, or use of, real property. In certain instances, a visual inspection of the property is also made. To facilitate the preparation of title reports, copies of public records, maps, documents and prior title policies may be compiled and indexed to specific properties in an area. This compilation is known as a “title plant.”

 

The beneficiaries of title insurance policies are generally real estate buyers and mortgage lenders. A title insurance policy indemnifies the named insured and certain successors in interest against title defects, liens and encumbrances existing as of the date of the policy and not specifically excepted from its provisions. The policy typically provides coverage for the real property mortgage lender in the amount of its outstanding mortgage loan balance and for the buyer in the amount of the purchase price of the property, but in some cases might insure for a greater amount where the buyer anticipates constructing improvements on the property. Coverage under a title insurance policy issued to a real property mortgage lender generally terminates upon the refinance or sale of the insured property unless the owner carries back a mortgage or makes certain warranties as to the title.

 

Before issuing title policies, title insurers seek to limit their risk of loss by accurately performing title searches and examinations. The major expenses of a title company relate to such searches and examinations, the preparation of preliminary reports or commitments and the maintenance of title plants, and not from claim losses as in the case of property and casualty insurers.

 

The Closing Process.    Title insurance is essential to the real estate closing process in most transactions involving real property mortgage lenders. In a typical residential real estate sale transaction, title insurance is generally ordered on behalf of an insured by a real estate broker, lawyer, developer, lender or closer involved in the transaction. Once the order has been placed, a title insurance company or an agent conducts a title search to determine the current status of the title to the property. When the search is complete, the title company or agent prepares, issues and circulates a commitment or preliminary title report (“commitment”) to the parties to the transaction. The commitment summarizes the current status of the title to the property, identifies the conditions, exceptions and/or limitations that the title insurer intends to attach to the policy and identifies items appearing on the title that must be eliminated prior to closing.

 

 

3


The closing function, sometimes called an escrow in western states, is often performed by a lawyer, an escrow company or a title insurance company or agent (such person or entity, the “closer”). Once documentation has been prepared and signed, and mortgage lender payoff demands are in hand, the transaction is “closed.” The closer records the appropriate title documents and arranges the transfer of funds to pay off prior loans and extinguish the liens securing such loans. Title policies are then issued insuring the priority of the mortgage of the real property mortgage lender in the amount of its mortgage loan and the buyer in the amount of the purchase price. The time lag between the opening of the title order and the issuance of the title policy is usually between 30 and 90 days. The seller and the buyer bear the risk during this time lag. Any matter affecting title which is discovered during this period would have to be dealt with to the title insurers’ satisfaction or the insurer would except the matter from the coverage afforded by the title policy. Before a closing takes place, however, the closer would request that the title insurer provide an update to the commitment to discover any adverse matters affecting title and, if any are found, would work with the seller to eliminate them so that the title insurer would issue the title policy subject only to those exceptions to coverage which are acceptable to the buyer and the buyer’s lender.

 

Issuing the Policy: Direct vs. Agency.    A title policy can be issued directly by a title insurer or indirectly on behalf of a title insurer through agents which are not themselves licensed as insurers. Where the policy is issued by a title insurer, the search is performed by or at the direction of the title insurer, and the premium is collected and retained by the title insurer. Where the policy is issued by an agent, the agent performs the search, examines the title, collects the premium and retains a portion of the premium. The remainder of the premium is remitted to the title insurer as compensation for bearing the risk of loss in the event a claim is made under the policy. The percentage of the premium retained by an agent varies from region to region. A title insurer is obligated to pay title claims in accordance with the terms of its policies, regardless of whether it issues its policy directly or indirectly through an agent.

 

Premiums.    The premium for title insurance is due and earned in full when the real estate transaction is closed. Premiums are generally calculated with reference to the policy amount. The premium charged by a title insurer or an agent is subject to regulation in most areas. Such regulations vary from state to state.

 

The Company’s Title Insurance Operations

 

Overview.    The Company, through First American Title Insurance Company and its subsidiaries, transacts the business of title insurance through a network of both direct operations and agents. Through this network, the Company issues policies in all states (except Iowa) and the District of Columbia. In Iowa, the Company provides abstracts of title only, because title insurance is not permitted. The Company also offers title services in Australia, the Bahama Islands, Canada, England, Guam, Ireland, Mexico, Puerto Rico, Scotland, South Korea, the U.S. Virgin Islands and other countries abroad.

 

Based on industry statistics showing premiums written in 2001, the Company had the largest or second largest share of the title insurance market in 27 states and in the District of Columbia, and had a national market share of 22.9%. Industry statistics for 2002 are not currently available.

 

The Company plans to continue increasing its share of the title insurance market through strategic acquisitions and further development of its existing branch office and agency operations. The Company also will continue to focus on expanding its share of the higher margin, title insurance business conducted on behalf of commercial clients. The Company believes its national commercial market share has grown through programs directed at major developers, lenders and law firms.

 

Sales and Marketing.    The Company markets its title insurance services to a broad range of customers. The Company believes that its primary source of business is from referrals from persons in the real estate community, such as independent escrow companies, real estate brokers, developers, mortgage brokers, mortgage bankers, financial institutions and attorneys. In addition to the referral market, the Company markets its title insurance services directly to large corporate customers and mortgage lenders. As title agents contribute a large portion of the

 

4


Company’s revenues, the Company also markets its title insurance services to independent agents. The Company’s marketing efforts emphasize the quality and timeliness of its services, process innovation and its national presence.

 

While virtually all personnel in the Company’s title insurance business assist in marketing efforts, the Company maintains a sales force of more than 1,000 persons dedicated solely to marketing. This sales force, which is located throughout the Company’s branch office network, not only markets the Company’s title insurance services, but also certain of the Company’s other products. The Company provides its sales personnel with training in selling techniques, and each branch manager is responsible for hiring the sales staff and ensuring that sales personnel under his or her supervision are properly trained. In addition to this sales force, the Company has approximately 50 salespeople in its national commercial services division. One of the responsibilities of the sales personnel of this division is the coordination of marketing efforts directed at large real estate lenders and companies developing, selling, buying or brokering properties on a multistate basis. The Company also supplements the efforts of its sales force through general advertising in various trade and professional journals.

 

The Company’s increased commercial sales effort during the past decade has enabled the Company to expand its commercial business base. Because commercial transactions involve higher coverage amounts and yield higher premiums, commercial title insurance business generates greater profit margins than does residential title insurance business. Accordingly, the Company plans to continue to emphasize its commercial sales program.

 

Although sales outside of the United States account for a small percentage of the Company’s revenues, the Company believes that the acceptance of title insurance in foreign markets has increased in recent years. Accordingly, the Company plans to continue its international sales efforts, particularly in Canada, the United Kingdom and Australia.

 

Underwriting.    Before a title insurance policy is issued, a number of underwriting decisions are made. For example, matters of record revealed during the title search may require a determination as to whether an exception should be taken in the policy. The Company believes that it is important for the underwriting function to operate efficiently and effectively at all decision making levels so that transactions may proceed in a timely manner. To perform this function, the Company has underwriters at the branch level, the regional level and the national level.

 

Agency Operations.    The relationship between the Company and each agent is governed by an agency agreement which states the conditions under which the agent is authorized to issue title insurance policies on behalf of the Company. The agency agreement also prescribes the circumstances under which the agent may be liable to the Company if a policy loss is attributable to error of the agent. Such agency agreements typically have a term of one to five years and are terminable immediately for cause.

 

Due to the high incidence of agency fraud in the title insurance industry during the late 1980s, the Company instituted measures to strengthen its agent selection and audit programs. In determining whether to engage an independent agent, the Company investigates the agent’s experience, background, financial condition and past performance. The Company maintains loss experience records for each agent and conducts periodic audits of its agents. The Company has also increased the number of agent representatives and agent auditors that it employs. Agent representatives periodically visit agents and examine their books and records. In addition to periodic audits, a full agent audit will be triggered if certain “warning signs” are evident. Warning signs that can trigger an audit include the failure to implement Company-required accounting controls, shortages of escrow funds and failure to remit underwriting fees on a timely basis.

 

Title Plants.    The Company’s network of title plants constitutes one of its principal assets. A title search is conducted by searching the public records or utilizing a title plant. While public records are indexed by reference to the names of the parties to a given recorded document, most title plants arrange their records on a geographic basis. Because of this difference, records of a title plant are generally easier to search. Most title plants also index prior policies, adding to searching efficiency. Many title plants are computerized. Certain offices of the Company

 

5


utilize jointly owned plants or utilize a plant under a joint user agreement with other title companies. The Company believes its title plants, whether wholly or partially owned or utilized under a joint user agreement, are among the best in the industry.

 

The Company has significantly enhanced its investment in title plants through three business combinations. The first was the formation of a limited liability corporation (“LLC”) with Experian Information Solutions on January 1, 1998. Experian Information Solutions contributed to the LLC its real estate information division, which the Company believes is the nation’s leading operator of title plants. The second business combination was the acquisition of Data Tree in June 1998. Data Tree is a supplier of database management and document imaging systems. The third business combination was the formation of Data Trace Information Services. This business is 80% owned by a subsisdiary of the Company and 20% owned by a subsidiary of LandAmerica. Data Trace Information Services is a provider of comprehensive title information delivery systems.

 

The Company’s title plants are carried on its balance sheet at original cost, which includes the cost of producing or acquiring interests in title plants or the appraised value of subsidiaries’ title plants at dates of acquisition for companies accounted for as purchases. Thereafter, the cost of daily maintenance of these plants is charged to expense as incurred. A properly maintained title plant has an indefinite life and does not diminish in value with the passage of time. Therefore, in accordance with generally accepted accounting principles, no provision is made for depreciation of these plants. Since each document must be reviewed and indexed into the title plant, such maintenance activities constitute a significant item of expense. The Company is able to offset title plant maintenance costs at its plants through joint ownership and access agreements with other title insurers and title agents.

 

Reserves for Claims and Losses.    The Company provides for title insurance losses based upon its historical experience by a charge to expense when the related premium revenue is recognized. The resulting reserve for known claims and incurred but not reported claims reflects management’s best estimate of the total costs required to settle all claims reported to the Company and claims incurred but not reported, and is considered by the Company to be adequate for such purpose.

 

In settling claims, the Company occasionally purchases and ultimately sells the interest of the insured in the real property or the interest of the claimant adverse to the insured. These assets, which totaled $41.6 million at December 31, 2002, are carried at the lower of cost or fair value, less costs to sell, and are included in “Other assets” in the Company’s consolidated balance sheets.

 

Reinsurance and Coinsurance.    The Company assumes and distributes large title insurance risks through mechanisms of reinsurance and coinsurance. In reinsurance agreements, in consideration for a portion of the premium, the reinsurer accepts that part of the risk which the primary insurer cedes to the reinsurer over and above the portion retained by the primary insurer. The primary insurer, however, remains liable for the total risk in the event that the reinsurer does not meet its obligation. As a general rule, the Company does not retain more than $40 million of primary risk on any single policy. Under coinsurance agreements, each coinsurer is jointly and severally liable for the risk insured, or for so much thereof as is agreed to by the parties. The Company’s reinsurance activities account for less than 1.0% of its total title insurance operating revenues.

 

Competition.    The title insurance business is highly competitive. The number of competing companies and the size of such companies varies in the different areas in which the Company conducts business. Generally, in areas of major real estate activity, such as metropolitan and suburban localities, the Company competes with many other title insurers. Approximately 75 title insurance underwriters are members of the American Land Title Association, the title insurance industry’s national trade association. The Company’s major nationwide competitors in its principal markets include Fidelity National Title Insurance Company (which also includes Chicago Title, Ticor Title Insurance Company and Security Union Title Insurance Company) LandAmerica Title Insurance Company, Stewart Title Guaranty Company and Old Republic Title Insurance Group. In addition to these nationwide competitors, numerous agency operations throughout the country provide aggressive competition on the local level.

 

 

6


The Company believes that competition for title insurance business is based primarily on the quality and timeliness of service, because parties to real estate transactions are usually concerned with time schedules and costs associated with delays in closing transactions. In those states where prices are not established by regulatory authorities, the price of title insurance policies is also an important competitive factor. The Company believes that it provides quality service in a timely manner at competitive prices.

 

Specialty Insurance Segment

 

Home Warranties.    The Company’s home warranty business commenced operations in 1984, in part with the proceeds of a $1.5 million loan from the Company which was, in 1986, converted to a majority equity interest. The Company currently owns 92% of its home warranty business, with the balance owned by management of that subsidiary. The Company’s home warranty business issues one-year warranties that protect homeowners against defects in household systems and appliances, such as plumbing, water heaters and furnaces. The Company’s home warranty subsidiary currently charges approximately $245 to $420 for its basic home warranty contract. Optional coverage is available for air conditioners, pools, spas, washers, dryers, refrigerators and other items for charges ranging from approximately $25 to $160. For an additional charge, coverage is renewable annually at the option of the homeowner upon approval by the home warranty subsidiary. Fees for the warranties are paid at the closing of the home purchase and are recognized monthly over a 12-month period. Home warranties are marketed through real estate brokers and agents. This business is conducted in certain counties of Alabama, Arizona, Arkansas, California, Colorado, Florida, Georgia, Idaho, Illinois, Kansas, Louisiana, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah and Washington. The principal competitor of the Company’s home warranty business is American Home Shield, a subsidiary of Service Master L.P.

 

Property and Casualty Insurance.    The Company offers property and casualty insurance through its subsidiaries First American Property and Casualty Insurance Company and First American Specialty Insurance Company. First American Property and Casualty Insurance Company conducts its business utilizing the Company’s distribution channels, allowing for cross selling through existing closing-service activities. First American Specialty Insurance Company conducts its business utilizing a network of brokers in California.

 

Trust and Other Services Segment

 

Trust, Investment Advisory and Thrift Services.     Since 1960, the Company has conducted a general trust business in California, acting as trustee when so appointed pursuant to court order or private agreement. In 1985, the Company formed a banking subsidiary into which its subsidiary trust operation was merged. During August 1999, this subsidiary converted from a state-chartered bank to a federal savings bank. As of December 31, 2002, the trust operation was administering fiduciary and custodial assets having a market value in excess of $1.9 billion. The Company offers investment advisory services through its SEC registered investment management firm that manages equity and fixed-income securities.

 

During 1988, the Company, through a majority owned subsidiary, acquired an industrial bank (the Thrift), formerly known as an industrial loan corporation, that accepts thrift deposits and uses deposited funds to originate and purchase loans secured by commercial properties primarily in Southern California. As of December 31, 2002, the Thrift had $84.5 million of demand deposits and $108.2 million of loans outstanding.

 

Loans made or acquired during the current year, by the Thrift, ranged in amount from $95,300 to $3,900,000. The average loan balance outstanding at December 31, 2002, was $389,954. Loans are made only on a secured basis, at loan-to-value percentages no greater than 75.0%. The Thrift specializes in making commercial real estate loans. In excess of 99.5% of the Thrift’s loans are made on a variable rate basis. The average yield on the Thrift’s loan portfolio as of December 31, 2002, was 8.54%. A number of factors are included in the determination of average yield, principal among which are loan fees and closing points amortized to income, prepayment penalties recorded as income, and amortization of discounts on purchased loans. The Thrift’s

 

7


primary competitors in the Southern California commercial real estate lending market are local community banks, other thrift and loan companies and, to a lesser extent, commercial banks. The Thrift’s average loan is 12.5 years in duration.

 

The performance of the Thrift’s loan portfolio is evaluated on an ongoing basis by management of the Thrift. The Thrift places a loan on nonaccrual status when two payments become past due. When a loan is placed on nonaccrual status, the Thrift’s general policy is to reverse from income previously accrued but unpaid interest. Income on such loans is subsequently recognized only to the extent that cash is received and future collection of principal is probable. Interest income on nonaccrual loans which would have been recognized during the year ended December 31, 2002, if all of such loans had been current in accordance with their original terms, totaled $8,428.

 

The following table sets forth the amount of the Thrift’s nonperforming loans as of the dates indicated.

 

    

Year Ended December 31


    

2002


  

2001


  

2000


  

1999


  

1998


    

(in thousands)

Nonperforming Assets:

                                  

Loans accounted for on a nonaccrual basis

  

$

65

  

$

94

  

$

89

  

$

707

  

$

898

Accruing loans past due 90 or more days

                                  

Troubled debt restructurings

                                  
    

  

  

  

  

Total

  

$

65

  

$

94

  

$

89

  

$

707

  

$

898

    

  

  

  

  

 

Based on a variety of factors concerning the creditworthiness of its borrowers, the Thrift determined that it had $65,148 of potential problem loans in existence as of December 31, 2002.

 

The Thrift’s allowance for loan losses is established through charges to earnings in the form of provision for loan losses. Loan losses are charged to, and recoveries are credited to, the allowance for loan losses. The provision for loan losses is determined after considering various factors, such as loan loss experience, maturity of the portfolio, size of the portfolio, borrower credit history, the existing allowance for loan losses, current charges and recoveries to the allowance for loan losses, the overall quality of the loan portfolio, and current economic conditions, as determined by management of the Thrift, regulatory agencies and independent credit review specialists. While many of these factors are essentially a matter of judgment and may not be reduced to a mathematical formula, the Company believes that, in light of the collateral securing its loan portfolio, the Thrift’s current allowance for loan losses is an adequate allowance against foreseeable losses.

 

 

8


The following table provides certain information with respect to the Thrift’s allowance for loan losses as well as charge-off and recovery activity.

 

    

Year Ended December 31


 
    

2002


    

2001


    

2000


    

1999


    

1998


 
    

(in thousands, except percentages)

 

Allowance for Loan Losses:

                                            

Balance at beginning of year

  

$

1,050

 

  

$

1,020

 

  

$

905

 

  

$

1,150

 

  

$

1,185

 

    


  


  


  


  


Charge-offs:

                                            

Real estate—mortgage

  

 

—  

 

  

 

(140

)

  

 

—  

 

  

 

(346

)

  

 

(164

)

Assigned lease payments

  

 

(3

)

  

 

(2

)

  

 

(2

)

  

 

—  

 

  

 

(34

)

    


  


  


  


  


    

 

(3

)

  

 

(142

)

  

 

(2

)

  

 

(346

)

  

 

(198

)

    


  


  


  


  


Recoveries:

                                            

Real estate—mortgage

  

 

—  

 

  

 

—  

 

  

 

9

 

  

 

—  

 

  

 

—  

 

Assigned lease payments

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

4

 

    


  


  


  


  


    

 

—  

 

  

 

—  

 

  

 

9

 

  

 

—  

 

  

 

4

 

    


  


  


  


  


Net charge-offs

  

 

(3

)

  

 

(142

)

  

 

7

 

  

 

(346

)

  

 

(194

)

Provision for losses

  

 

123

 

  

 

172

 

  

 

108

 

  

 

101

 

  

 

159

 

    


  


  


  


  


Balance at end of year

  

$

1,170

 

  

$

1,050

 

  

$

1,020

 

  

$

905

 

  

$

1,150

 

    


  


  


  


  


Ratio of net charge-offs during the year to average loans outstanding during the year

  

 

.00

%

  

 

.14

%

  

 

(.01

%)

  

 

.4

%

  

 

.3

%

    


  


  


  


  


 

The adequacy of the Thrift’s allowance for loan losses is based on formula allocations and specific allocations. Formula allocations are made on a percentage basis, which is dependent on the underlying collateral, the type of loan and general economic conditions. Specific allocations are made as problem or potential problem loans are identified and are based upon an evaluation by the Thrift’s management of the status of such loans. Specific allocations may be revised from time to time as the status of problem or potential problem loans changes.

 

The following table shows the allocation of the Thrift’s allowance for loan losses and the percent of loans in each category to total loans at the dates indicated.

 

    

Year Ended December 31


    

2002


  

2001


  

2000


  

1999


  

1998


    

Allowance


  

% of Loans


  

Allowance


  

% of Loans


  

Allowance


  

% of Loans


  

Allowance


  

% of Loans


  

Allowance


  

% of

Loans


    

(in thousands, except percentages)

Loan Categories:

                                                           

Real estate-mortgage

  

$

1,159

  

100

  

$

1,036

  

100

  

$

1,002

  

100

  

$

904

  

100

  

$

1,100

  

100

Real estate-construction

                                                           

Assigned lease payments

  

 

—  

       

 

—  

       

 

—  

       

 

—  

       

 

—  

    

Other

  

 

11

       

 

14

       

 

18

       

 

1

       

 

50

    
    

  
  

  
  

  
  

  
  

  
    

$

1,170

  

100

  

$

1,050

  

100

  

$

1,020

  

100

  

$

905

  

100

  

$

1,150

  

100

    

  
  

  
  

  
  

  
  

  

 

The Information Technology Group

 

Mortgage Information Segment

 

The mortgage information segment provides tax monitoring, flood certification, default management services, and other real estate related services.

 

Tax Monitoring.    The tax monitoring service, established by the Company in 1987, advises real property mortgage lenders of the status of property tax payments due on real estate securing their loans. With the

 

9


acquisition of TRTS Data Services, Inc., in November 1991, the Company believes that it is the second largest provider of tax monitoring services in the United States.

 

Under a typical contract, a tax service provider monitors, on behalf of a mortgage lender, the real estate taxes owing on properties securing such lender’s mortgage loans for the life of such loans. In general, providers of tax monitoring services, such as the Company’s tax service, indemnify mortgage lenders against losses resulting from a failure to monitor delinquent taxes. Where a mortgage lender requires that tax payments be impounded on behalf of borrowers, providers of tax monitoring services, such as the Company’s tax service, may be required to monitor and oversee the transfer of these monies to the taxing authorities and provide confirmation to lenders that such taxes have been paid.

 

The Company’s primary source of tax service business is from large multistate mortgage lenders. The Company’s only major nationwide competitor in the tax service business is Transamerica Real Estate Tax Service. Because of its broad geographic coverage and the large number of mortgage loans not being serviced by a third party tax service provider, the Company believes that it is well positioned to increase its market share in the tax service market.

 

The fee charged to service each mortgage loan varies from region to region, but generally falls within the $45 to $105 price range and is paid in full at the time the contract is executed. The Company recognizes revenues from tax service contracts over the estimated duration of the contracts. However, income taxes are paid on the entire fee in the year the fee is received. Historically, the Company has maintained minimal reserves for losses relating to its tax monitoring service because its losses have been negligible.

 

Flood Determination.    In January 1995, the Company acquired Flood Data Services, Inc. (now a division of First American Real Estate Solutions LLC). This business furnishes to mortgage lenders flood zone determination reports, which provide information on whether or not property securing a loan is in a governmentally delineated special flood hazard area. Federal legislation passed in 1994 requires that most mortgage lenders obtain a determination of the current flood zone status at the time each loan is originated and obtain updates during the life of the loan. The Company believes it is the largest provider of flood zone determinations in the United States, based on the number of flood zone determination reports issued.

 

Default Management Services.    The default management business supports mortgage servicers and financial institutions in the handling of loss mitigation, foreclosure, REO and claims processing. With the acquisition in 2001 of LFC Nationwide, a leading provider of property preservation and field inspections, the Company believes it is now the nation’s leading provider of default management services, based on the number of foreclosure/bankruptcy cases reported.

 

Other Real Estate Related Services.    In April 1996, the Company acquired the Excelis Mortgage Loan Servicing System (MLS), now known as Excelis, Inc. Excelis MLS is the only commercially available real-time, online servicing system that has been developed since 1990 to meet increasingly sophisticated market demands. The software employs rules-based technology which enables the user to customize the system to fit its individual servicing criteria and policies.

 

In July 1998, the Company acquired ShadowNet Mortgage Technologies, LLC. ShadowNet is a provider of electronic mortgage preparation and delivery systems and now conducts business under the First American Nationwide Documents brand-name.

 

Property Information Segment

 

This business was established in January 1998 when the Company and certain of its real estate information service subsidiaries (the “Real Estate Information Subsidiaries”) consummated a joint venture with Experian in which First American Real Estate Solutions LLC (“FARES”) was established. Under the transaction, the

 

10


Real Estate Information subsidiaries contributed substantially all of their assets and liabilities to FARES in exchange for an 80% ownership interest and Experian transferred substantially all of the assets and liabilities of its Real Estate Solutions division (RES) to FARES in exchange for a 20% ownership interest. FARES is believed to be the nation’s foremost supplier of core real estate data, providing, among other things, property valuation information, title information, tax information and imaged title documents.

 

Adding to this business, in June 1998, the Company acquired Data Tree Corporation. Data Tree is a supplier of database management and document imaging systems to county recorders, other governmental agencies and the title industry.

 

In July 2000, FARES combined its Smart Title Solutions division with the Datatrace division of LandAmerica Financial Group, Inc (“LandAmerica”). The combined entity, Data Trace Information Services, is 80% owned by FARES and 20% owned by LandAmerica. The Company believes that Data Trace Information Services is the nation’s most advanced and comprehensive title information delivery system.

 

In August 2000, FARES combined its RES division with the Intellitech real estate information business of Transamerica Corporation to form a new entity, First American Real Estate Solutions, L.P. This joint venture is 80% owned by the Company’s subsidiary, FARES, and 20% by Transamerica Corporation. The Company believes that this joint venture owns the nation’s largest database of property characteristic information, supplying data and decision-support products to the real estate and mortgage finance industry.

 

In June 2002, the Company acquired Tri County Tax Research, Inc., a provider of tax searches for title companies in the Detroit, Michigan metropolitan area. In July of 2002, the Company acquired Current Status, Inc., a provider of property tax searches for customers in the New Jersey and Western Pennsylvania markets. These acquisitions strengthened the Company’s existing tax information business.

 

In September 2002, the Company added to its property valuation information business by acquiring SourceOne Services, Corp., a provider of real estate valuation services in the form of broker price opinions (BPO). The Company believes that SourceOne Services is the largest provider of BPO services to the default market and the second largest provider of BPO services in the United States.

 

Credit Information Segment

 

The Company’s credit information segment provides credit reports to mortgage lenders throughout the United States. These reports are derived from two or more credit bureau sources and are summarized and prepared in a standard form acceptable to mortgage loan originators and secondary mortgage purchasers. The Company’s credit reporting service has grown primarily through acquisitions. In 1994, the Company acquired all of the minority interests in its lower tier subsidiaries Metropolitan Credit Reporting Services, Inc., and Metropolitan Property Reporting Services, Inc. In 1994, the Company also acquired California Credit Data, Inc., and Prime Credit Reports, Inc., and in 1995, the Company acquired CREDCO, Inc. (now a division of First American Real Estate Solutions LLC). With the acquisition of First American CREDCO, Inc., the Company believes that it is now the largest mortgage credit reporting service in the United States, based on the number of credit reports issued.

 

The credit information segment also provides specialized credit reports to non-mortgage lenders and directly to consumers. The specialized reports are derived from one or more credit bureau sources and are summarized and prepared in an acceptable form. This segment also provides credit reporting services to businesses marketing products to sub-prime consumers.

 

Screening Information

 

The Company’s screening information segment is a leading provider of background screening and verification services in the United States. These services include motor vehicle reports, tenant screening, employee background screening and occupational health.

 

 

11


Motor Vehicle Reports.     The Company provides automated access to driving records from all 50 states and the District of Columbia. Insurance companies represent the core of the customer base for this product, which they use for underwriting purposes. Employers also utilize the product to manage risk associated with employees that require the use of a vehicle in the performance of their duties. For most customers, the Company receives and fulfills orders through its proprietary software known as Comprise/ZapApp software, which allows the customer to integrate the process of obtaining motor vehicles reports with other processes utilized by the customer. Generally, demand for this product decreases in November and December as a result of seasonal reductions in the insurance and employment markets.

 

Tenant Screening.     The Company provides tenant screening services to landlords and managers of multifamily residential properties. These services include reports containing information derived from the Company’s database of eviction records, major credit bureaus, provided references and criminal records. Depending on a customer’s needs, reports can draw on any combination of these sources. One of the Company’s products, for example, provides customers with a comprehensive report of rental history and eviction filings drawn on the Company’s proprietary database. Customers also can order products which assess risk of default by a potential tenant based on a statistical model. Customers generally order and receive the Company’s tenant screening products through a secure Internet connection or through software. In these services the Company experiences moderate seasonality, with a slightly disproportionate share of revenue being generated from March through October.

 

Employee Background Screening.     The Company provides employee background screening services to thousands of companies in the United States. These services include reports about a prospective employee’s criminal record, motor vehicle violations, credit standing and involvement in civil litigation. The Company also makes inquiries of provided references and former employers, verifies educational credentials and licenses and checks industry specific records. A customer can order any of these and other related services individually or as a package. Depending on a customer’s preference, orders may be placed and fulfilled directly from the Company, through a secure Internet connection, via facsimile or through third party vendors. Because of the diverse clientele for the employee background screening products, seasonality is minimal. Generally, the Company experiences any lull in the demand for its screening products near year end and during the summer, when employers typically slow their hiring pace.

 

Occupational Health.     The Company also provides its customers with a comprehensive set of occupational health services, which helps employers manage occupational health issues with respect to both prospective and existing employees. Generally, these products involve first the design and implementation of a drug testing program, including provision for the collection and testing of specimens. Through its staff of doctors, the Company then interprets the results. Ultimately, a report is delivered to customers through a secure Internet connection or through other direct means.

 

The Company also develops and manages employee assistance programs, which provide troubled employees with access to confidential counseling services. These programs cover a wide range of personal and workplace issues, including alcohol and drug abuse, marital problems, family matters, bereavement management, depression, stress, retirement and downsizing. The Company’s employee assistance programs also provide employers with a number of corporate-focused services, including critical incident stress management programs, organizational change consulting and intensive specialty training on issues such as violence in the workplace.

 

Approximately 75% of the Company’s occupational health business is derived from employment screening, with the balance attributable to ongoing drug testing programs and employee assistance programs.

 

As with its employee background screening products, any seasonality in the demand for the Company’s occupational health products generally is attributable to decreases in hiring which occur near year end and during the summer.

 

 

12


Subsequent Event Business Combination.    In December 2002, the Company and US SEARCH.com Inc., a provider of location, verification and screening services, signed a definitive agreement to merge the Company’s screening information business with US SEARCH to create a new publicly held company that will be named First Advantage Corporation. This new entity will be approximately 80% owned by the Company, with the remainder owned by the shareholders of US SEARCH. The Company expects this transaction to close during the second quarter of 2003.

 

Acquisitions

 

Commencing in the 1960s, the Company initiated a growth program with a view to becoming a nationwide provider of title insurance. This program included expansion into new geographic markets through internal growth and selective acquisitions. In 1986 the Company began expanding into other real estate business information services. In 1998, the Company expanded its diversification program to include business information companies outside of the real estate transfer and closing process. To date, the Company has made numerous strategic acquisitions designed to expand not only its direct title operations, but also the range of services it can provide to its customers.

 

Regulation

 

The title insurance business is regulated by state insurance authorities. These authorities generally possess broad powers with respect to the licensing of title insurers, the types and amounts of investments that title insurers may make, insurance rates, forms of policies and the form and content of required annual statements, as well as the power to audit and examine title insurers. Under state laws, certain levels of capital and surplus must be maintained and certain amounts of securities must be segregated or deposited with appropriate state officials. Various state statutes require title insurers to defer a portion of all premiums in a reserve for the protection of policyholders and to segregate investments in a corresponding amount. Further, most states restrict the amount of dividends and distributions a title insurer may make to its shareholders.

 

In 1999, the Company entered into the property casualty insurance business through the acquisitions of Great Pacific Insurance Company (included in the acquisition of National Information Group) and Five Star Holdings, Inc. The property and casualty business is subject to regulation by government agencies in the states in which they transact business. The nature and extent of such regulation may vary from jurisdiction to jurisdiction, but typically involves prior approval of the acquisition of “control” of an insurance company, regulation of certain transactions entered into by an insurance company with any of its affiliates, the payment of dividends by an insurance company, approval of premium rates and policy forms for many lines of insurance, standards of solvency and minimum amounts of capital and surplus which must be maintained. In order to issue policies on a direct basis in a state, the property and casualty insurer must generally be licensed by such state. In certain circumstances, such as dealings initiated directly by citizens or placements through licensed surplus lines brokers, it may conduct business without being admitted and without being subject to rate and/or policy forms approval. The Company is currently licensed to write property and casualty insurance in 46 states and the District of Columbia.

 

The Company’s home warranty business also is subject to regulation by insurance authorities in the states in which it conducts such business. The Company’s trust company and industrial loan company (Thrift) are both subject to regulation by the Federal Deposit Insurance Corporation. In addition, as a federal savings bank, the Company’s trust company is regulated by the United States Department of the Treasury’s Office of Thrift Supervision, and the Company’s industrial loan company (Thrift) is regulated by the California Commissioner of Corporations.

 

Investment Policies

 

The Company invests primarily in cash equivalents, federal and municipal governmental securities, mortgage loans and investment grade debt and equity securities. The largely fixed income portfolio is classified

 

13


in the Company’s financial statements as “available for sale.” In addition to the Company’s investment strategy, state laws impose certain restrictions upon the types and amounts of investments that may be made by the Company’s regulated subsidiaries.

 

Employees

 

The following table provides a summary of the total number of employees as of December 31, 2002:

 

Business
  

Number of Employees


Title Insurance

  

16,688

Specialty Insurance

  

753

Trust and Other Services

  

132

Mortgage Information

  

3,395

Property Information

  

1,974

Credit Information

  

1,015

Screening Information

  

706

Corporate

  

223

    

Total

  

24,886

    

 

Item 2.    Properties.

 

In September 1999, the Company moved its executive offices to one of the newly constructed office buildings at MacArthur Place in Santa Ana, California. The Orange County branch and certain other operations of the Company’s title insurance segment moved into two other buildings constructed on the site later in 1999. The three new buildings are in a campus environment and total approximately 210,000 square feet. The Company continues to own the two adjacent buildings in Santa Ana, California, which previously housed its executive offices. That location, comprising approximately 105,000 square feet of floor space, houses the headquarters of the Company’s trust and banking division and the Company’s property and casualty insurance division. The Company also owns an 18,000 square foot building located across the street from that complex. This building is currently used primarily for storage.

 

The Company’s title insurance subsidiary, First American, and its subsidiaries, own or lease buildings or office space in more than 900 locations throughout the United States and abroad, principally for their respective title operations.

 

The Company’s real estate information subsidiary, First American Real Estate Information Services, Inc. (“FAREISI”), houses its national operations in a leased 231,000 square foot office building in Dallas, Texas. In 1999, the Company completed the construction of two office buildings in Poway, California. The two buildings total approximately 152,000 square feet and are located on a 17 acre parcel of land. The buildings are occupied by various divisions of FAREISI. In addition, FAREISI and its subsidiaries lease office space in more than 75 locations throughout the United States, principally for their respective operations.

 

The Company’s home warranty subsidiary owns 1.7 acres of land in Van Nuys, California, which contains a 20,000-square-foot office building, a 7,000-square-foot warehouse and a parking lot.

 

Each of the office facilities occupied by the Company or its subsidiaries is in good condition and adequate for its intended use.

 

 

14


Item 3.    Legal Proceedings.

 

The Company and certain of its subsidiaries on October 2, 2002, settled the lawsuit filed against certain of the Company’s subsidiaries by the state of California in the California state court in Sacramento, California. On or about September 18, 2002, the Company and certain of its subsidiaries settled a related class action lawsuit filed in the state court in the county of Los Angeles, California.

 

These lawsuits involved allegations that certain subsidiaries of the Company and certain of their competitors failed to turn over unclaimed property to the state of California on a timely basis; charged California home buyers and other escrow customers fees for services that were never performed or that cost less than the amount charged; and devised and carried out programs, known as earnings credits, with financial institutions to receive interest on escrow funds placed in demand deposits.

 

Under the terms of the settlements, the Company will pay up to $5.5 million to certain customers in the form of cash refunds and discounts against future title insurance and escrow services. The settlements further require the Company to pay approximately $2.5 million to specified governmental agencies;, counsel to the class action plaintiffs; and the Consumer Protection Prosecution Trust Fund, a trust fund established to assist consumers in protecting their rights.

 

The settlements provide that they do not constitute an admission of liability or wrongdoing by the Company or any of its subsidiaries.

 

The Company is involved in numerous routine legal proceedings related to its operations. While the ultimate disposition of each proceeding is not determinable, the Company does not believe that any of such proceedings will have a material adverse effect on its financial condition or results of operations.

 

Item 4.    Submission of Matters to a Vote of Security Holders.

 

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

 

15


 

PART II

 

Item 5.    Market for Registrant’s Common Stock and Related Stockholder Matters.

 

Common Stock Market Prices and Dividends

 

The Company’s common stock trades on the New York Stock Exchange (ticker symbol FAF). The approximate number of record holders of common stock on March 3, 2003 was 3,623.

 

High and low stock prices and dividends for the last two years were as follows:

 

    

2002


  

2001


Quarter Ended


  

High-low range


  

Cash dividends


  

High-low range


  

Cash

dividends


March 31

  

$21.80—$17.71

  

$.07

  

$34.91—$25.39

  

$.06

June 30

  

$23.10—$20.42

  

$.08

  

$26.55—$18.85

  

$.07

September 30

  

$22.20—$16.54

  

$.08

  

$20.45—$16.71

  

$.07

December 31

  

$22.50—$18.98

  

$.10

  

$21.07—$16.51

  

$.07

 

While the Company expects to continue its policy of paying regular quarterly cash dividends, future dividends will be dependent on future earnings, financial condition and capital requirements. The payment of dividends is subject to the restrictions described in Note 2 to the consolidated financial statements. included in “Item 8. Financial Statements and Supplementary Data” of Part II of this report.

 

Plan category


    

Number of Securities

to be Issued Upon

Exercise of

Outstanding Options

(a)


    

Weighted-Average

Exercise Price of

Outstanding Options

(b)


    

Number of Securities

Remaining Available

for Future issuance

Under Equity

Compensation Plans

(Excluding

Securities Reflected

in Column (a))

(c)


                        

Equity Compensation Plans Approved by
Security Holders (1)

    

8,372,296

    

$

16.56

    

6,342,064

Equity Compensation Plans Not Approved by Security Holders (2)

    

574,168

    

$

18.26

    

—  

      
             
      

8,946,464

    

$

16.66

    

6,342,064

      
             

(1)   Consists of The First American Corporation 1996 Stock Option Plan and The First American Corporation 1997 Directors’ Stock Plan. See Note 13 to the Company’s consolidated financial statements for additional information.

 

(2)   Includes shares related to plans assumed by the Company in the purchase of Credit Management Solutions, Inc. and the business combination with National Information Group. See Note 13 to the Company’s consolidated financial statements for additional information.

 

(3)   Includes 2,738,000 shares available to be issued under the Company’s stock purchase plan. See Note 13 to the Company’s consolidated financial statements for additional information.

 

Recent Sales of Unregistered Securities

 

In the last three years, the Company has not issued unregistered shares of its common stock.

 

16


 

Item 6.    Selected Financial Data.

 

The selected consolidated financial data for the Company for the five-year period ended December 31, 2002, has been derived from the audited Consolidated Financial Statements. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto, “Item 1—Business—Acquisitions,” and “Item 7—Management’s Discussion and Analysis—Results of Operations.”

 

The First American Corporation and Subsidiary Companies

 

   

Year Ended December 31


 
   

2002


    

2001


    

2000


    

1999


    

1998


 
   

(in thousands, except percentages, per share amounts and employee data)

 

Revenues

 

$

4,704,209

 

  

$

3,750,723

 

  

$

2,934,255

 

  

$

2,988,169

 

  

$

2,943,880

 

Income before cumulative effect of a change in accounting for tax service contracts (Note A)

 

$

234,367

 

  

$

167,268

 

  

$

82,223

 

  

$

88,643

 

  

$

201,527

 

Cumulative effect of a change in accounting for tax service contracts (Note A)

                   

 

—  

 

  

$

(55,640

)

  

 

—  

 

Net income

 

$

234,367

 

  

$

167,268

 

  

$

82,223

 

  

$

33,003

 

  

$

201,527

 

Total assets

 

$

3,398,045

 

  

$

2,837,263

 

  

$

2,199,737

 

  

$

2,116,414

 

  

$

1,852,731

 

Notes and contracts payable

 

$

425,705

 

  

$

415,341

 

  

$

219,838

 

  

$

196,815

 

  

$

143,466

 

Mandatorily redeemable preferred securities

 

$

100,000

 

  

$

100,000

 

  

$

100,000

 

  

$

100,000

 

  

$

100,000

 

Stockholders’ equity

 

$

1,364,589

 

  

$

1,104,452

 

  

$

870,237

 

  

$

815,991

 

  

$

762,265

 

Return on average stockholders’ equity (Note B)

 

 

19.0

%

  

 

16.9

%

  

 

9.8

%

  

 

10.9

%

  

 

33.4

%

Cash dividends on common shares

 

$

24,570

 

  

$

18,210

 

  

$

15,256

 

  

$

15,840

 

  

$

13,894

 

Per share of common stock (Note C)—

                                           

Basic:

                                           

Income before cumulative effect of a change in accounting for tax service contracts

 

$

3.27

 

  

$

2.51

 

  

$

1.29

 

  

$

1.37

 

  

$

3.35

 

Cumulative effect of a change in accounting for tax service contracts

 

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(.86

)

  

 

—  

 

   


  


  


  


  


Net income

 

$

3.27

 

  

$

2.51

 

  

$

1.29

 

  

$

.51

 

  

$

3.35

 

   


  


  


  


  


Diluted:

                                           

Income before cumulative effect of a change in accounting for tax service contracts

 

$

2.92

 

  

$

2.27

 

  

$

1.24

 

  

$

1.34

 

  

$

3.21

 

Cumulative effect of a change in accounting for tax service contracts

 

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(.84

)

  

 

—  

 

   


  


  


  


  


Net income

 

$

2.92

 

  

$

2.27

 

  

$

1.24

 

  

$

.50

 

  

$

3.21

 

   


  


  


  


  


Stockholders’ equity

 

$

18.53

 

  

$

16.08

 

  

$

13.62

 

  

$

12.54

 

  

$

12.08

 

Cash dividends

 

$

.33

 

  

$

.27

 

  

$

.24

 

  

$

.24

 

  

$

.23

 

Number of common shares outstanding

                                           

Weighted average during the year

                                           

Basic

 

 

71,594

 

  

 

66,568

 

  

 

63,680

 

  

 

64,669

 

  

 

60,194

 

Diluted

 

 

82,567

 

  

 

75,834

 

  

 

66,050

 

  

 

66,351

 

  

 

62,720

 

End of year

 

 

73,636

 

  

 

68,694

 

  

 

63,887

 

  

 

65,068

 

  

 

63,120

 

Title orders opened (Note D)

 

 

2,184

 

  

 

1,930

 

  

 

1,241

 

  

 

1,334

 

  

 

1,585

 

Title orders closed (Note D)

 

 

1,696

 

  

 

1,405

 

  

 

975

 

  

 

1,120

 

  

 

1,210

 

Number of employees

 

 

24,886

 

  

 

22,597

 

  

 

20,346

 

  

 

20,065

 

  

 

19,669

 

 

Note A—Resulted from the adoption of Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” which became effective January 1, 1999, and applied to the Company’s tax service operations.

 

Note B—Return on average stockholders’ equity for 1999 excludes the cumulative effect of a change in accounting for tax service contracts from both net income and stockholders’ equity.

 

Note C—Per share information relating to net income is based on weighted-average number of shares outstanding for the years presented. Per share information relating to stockholders’ equity is based on shares outstanding at the end of each year.

 

17


 

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Results of Operations

 

Critical Accounting Policies—The Company’s management considers the accounting policies described below to be critical in preparing the Company’s consolidated financial statements. These policies require management to make estimates and judgments that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosures of contingencies. See Note 1 to the consolidated financial statements for a more detailed description of the Company’s accounting policies.

 

Revenue recognition.    Title premiums on policies issued directly by the Company are recognized on the effective date of the title policy, and for policies issued by independent agents, when notice of issuance is received from the agent. Revenues from home warranty contracts are recognized ratably over the 12-month duration of the contracts. Revenues from property and casualty insurance policies are recognized ratably over the 12-month duration of the policies. The Company’s tax service division, which is included in the mortgage information segment, defers its tax service fee and recognizes that fee as revenue ratably over the expected service period. The amortization rates applied to recognize the revenues assume a 10-year contract life and are adjusted to reflect prepayments. The Company reviews its tax service contract portfolio on a quarterly basis to determine if there have been changes in contract lives and/or changes in the number and/or timing of prepayments and adjusts the rates accordingly to reflect current trends. For all other products, revenues are generated at the time of delivery, as the Company has no significant ongoing obligation after delivery.

 

Provision for title losses.    The Company provides for title insurance losses by a charge to expense when the related premium revenue is recognized. The amount charged to expense (the loss rate), as well as the adequacy of the ending reserves, is determined by the Company based on historical experience and other factors, including changes and trends in the type of title insurance policies issued, the real estate market and the interest rate environment. Management monitors the adequacy of the estimated loss reserves on a quarterly basis using a variety of techniques, including actuarial models, and adjusts the loss rate as necessary.

 

Purchase accounting and impairment testing for goodwill and other intangible assets.    Pursuant to Statement of Financial Standards No. 142, “Goodwill and Other Intangible Assets”, the Company is now required to perform an annual impairment test for goodwill and other intangible assets. This test is performed utilizing a variety of valuation techniques, all of which require management to make estimates and judgments, and includes discounted cash flow analysis, market approach valuations and the use of third-party valuation advisors. Certain of these valuation techniques are also utilized by the Company in accounting for business combinations, primarily in the determination of the fair value of acquired assets and liabilities.

 

Income taxes.    The Company estimates its quarterly effective income tax rate based upon a variety of factors, including but not limited to, the expected revenues and resulting pretax income for the year, the composition and geographic mix of the pretax income and the ratio of permanent differences to pretax income. Any changes to the estimated rate are made prospectively in accordance with Accounting Principles Board Opinions No. 28, “Interim Financial Reporting.” Additionally, management makes estimates as to the amount of reserves, if any, that are necessary for known and potential tax exposures.

 

Depreciation and amortization lives for assets.    Management is required to estimate the useful lives of several asset classes, including capitalized data, internally developed software and other intangible assets. The estimation of useful lives requires a significant amount of judgment related to matters such as future changes in technology, legal issues related to allowable uses of data and other matters.

 

Overview—The majority of the revenues in the Company’s title insurance and mortgage information segments depend, in large part, upon the level of real estate activity and the cost and availability of mortgage funds. Revenues for these segments result primarily from resales and refinancings of residential real estate and, to a lesser extent, from commercial transactions and the construction and sale of new housing. Over one-half of

 

18


the revenues in the Company’s property information and credit information segments also depend on real estate activity. The remaining portion of the property information and credit information revenues, as well as the revenues for the Company’s specialty insurance, trust and other services, and screening information segments, are isolated from the volatility of real estate transactions. Traditionally, the greatest volume of real estate activity, particularly residential resale, has occurred in the spring and summer months. However, changes in interest rates, as well as other economic factors, can cause fluctuations in the traditional pattern of real estate activity.

 

Mortgage interest rates, which had been decreasing throughout 1997 and 1998, began to increase in the second quarter of 1999, causing a significant decline in refinance activity and residential resale orders. This, coupled with fourth quarter seasonal factors and Y2K concerns, resulted in a low inventory of open orders going into the first quarter of 2000. As a result of the low inventory of open orders going into the first quarter of 2000, and the relatively weak real estate economy present during the first half of 2000, revenues and profits during this period decreased significantly when compared with the same period of 1999. During the second half of 2000, real estate activity began to increase as a result of declining mortgage interest rates. New order counts in the latter part of the third quarter began to show favorable comparisons with the same period of 1999. This trend continued into the fourth quarter of 2000 and resulted in a significant increase in revenues and profits in the second half of 2000 when compared with the same period of 1999.

 

In 2001 mortgage interest rates decreased to levels comparable to rates experienced in 1998. Refinance activity reached record levels and the demand for residential resale and new home sales continued to be very strong. All four quarters of 2001 compared favorably with the respective quarters of 2000.

 

The favorable trends present during 2001 continued into 2002. Refinance activity continued at high levels, reaching record levels during the third quarter of the year. Existing- and new-home-sale activity surpassed 2001 levels. Closed order counts reached all-time record levels resulting in record-setting operating results for the Company in 2002.

 

Operating revenues—A summary by segment of the Company’s operating revenues is as follows:

 

    

2002


  

%


  

2001


  

%


  

2000


  

%


    

(in thousands, except percentages)

Financial Services:

                                   

Title Insurance:

                                   

Direct operations

  

$

1,803,775

  

39

  

$

1,463,303

  

40

  

$

1,083,112

  

38

Agency operations

  

 

1,589,817

  

34

  

 

1,185,691

  

32

  

 

983,937

  

34

    

  
  

  
  

  
    

 

3,393,592

  

73

  

 

2,648,994

  

72

  

 

2,067,049

  

72

Specialty Insurance

  

 

143,307

  

3

  

 

112,054

  

3

  

 

115,171

  

4

Trust and Other Services

  

 

41,737

  

1

  

 

39,882

  

1

  

 

33,635

  

1

    

  
  

  
  

  
    

 

3,578,636

  

77

  

 

2,800,930

  

76

  

 

2,215,855

  

77

    

  
  

  
  

  

Information Technology:

                                   

Mortgage Information

  

 

479,288

  

10

  

 

407,006

  

11

  

 

307,826

  

11

Property Information

  

 

259,315

  

6

  

 

210,975

  

6

  

 

161,040

  

6

Credit Information

  

 

215,337

  

5

  

 

194,981

  

5

  

 

154,341

  

5

Screening Information

  

 

100,702

  

2

  

 

49,094

  

2

  

 

38,466

  

1

    

  
  

  
  

  
    

 

1,054,642

  

23

  

 

862,056

  

24

  

 

661,673

  

23

    

  
  

  
  

  

Total

  

$

4,633,278

  

100

  

$

3,662,986

  

100

  

$

2,877,528

  

100

    

  
  

  
  

  

 

Financial Services.    Operating revenues from direct title operations increased 23.3% in 2002 over 2001 and 35.1% in 2001 over 2000. The increase in 2002 over 2001 was due to a 20.8% increase in the number of title orders closed by the Company’s direct operations, coupled with a 2.0% increase in the average revenues per order closed. The increase in 2001 over 2000 was attributable to a 44.1% increase in the number of title orders

 

19


closed by the Company’s direct operations, offset in part by a 6.2% decrease in the average revenues per order closed. The Company’s direct title operations closed 1,696,100, 1,404,600 and 975,000 title orders during 2002, 2001 and 2000, respectively. The average revenues per order closed were $1,063, $1,042 and $1,111 for 2002, 2001 and 2000, respectively. The fluctuations noted in closed orders and average revenues per order closed were primarily attributable to the relative changes in real estate activity year-over-year, as mentioned above. Operating revenues from agency title operations increased 34.1% in 2002 over 2001 and 20.5% in 2001 over 2000. These increases were primarily attributable to the same factors affecting direct title operations compounded by the inherent delay in the reporting of transactions by agents.

 

Specialty insurance operating revenues increased 27.9% in 2002 over 2001 and decreased 2.7% in 2001 from 2000. The increase in 2002 over 2001 was primarily attributable to geographic expansion at the Company’s home warranty division and market share growth at the property and casualty insurance division. The decrease in 2001 from 2000 was primarily due to a $13.4 million reduction in revenues at the property and casualty insurance division as a result of the previously announced exit of the lender-placed homeowner’s insurance business.

 

Information Technology.    Mortgage information operating revenues increased 17.8% in 2002 over 2001 and 32.2% in 2001 over 2000. These increases were primarily attributable to the same factors affecting title insurance mentioned above, as well as acquisition activity. Operating revenues of $14.9 million and $14.2 million were contributed by new acquisitions in 2002 and 2001, respectively. In addition, during the current year, the Company’s tax service division accelerated its amortization rates to reflect the increase in refinance activity, resulting in a $6.5 million increase in operating revenues.

 

Property information operating revenues increased 22.9% in 2002 over 2001 and 31.0% in 2001 over 2000. These increases were primarily due to the same favorable real estate conditions that benefited the title insurance and mortgage information segments, as well as market share growth and acquisition activity. Operating revenues of $15.5 million and $16.4 million were contributed by new acquisitions in 2002 and 2001, respectively.

 

Credit information operating revenues increased 10.4% in 2002 over 2001 and 26.3% in 2001 over 2000. These increases were primarily due to growth in demand for credit information in the housing sector, as well as acquisition activity. Operating revenues of $9.2 million and $12.5 million were contributed by new acquisitions in 2002 and 2001, respectively.

 

Screening information operating revenues increased 105.1% in 2002 over 2001 and 27.6% in 2001 over 2000. These increases were primarily attributable to $49.8 million and $9.7 million of operating revenues contributed by new acquisitions for the respective periods.

 

Investment and other income—Investment and other income totaled $89.8 million, $81.1 million and $54.8 million in 2002, 2001 and 2000, respectively, an increase of $8.7 million, or 10.8% in 2002 over 2001, and $26.3 million, or 47.9% in 2001 over 2000. The increase in 2002 over 2001 was primarily due to an $18.3 million increase in equity in earnings of unconsolidated affiliates, offset, in part, by a $9.6 million decrease in net interest and other income, primarily as a result of lower yields on cash equivalents and the Company’s investment portfolio due to the lower interest rate environment. The increase in 2001 over 2000 was primarily attributable to a $23.4 million increase in equity in earnings of unconsolidated affiliates and a $2.9 million increase in net interest and other income. See Note 9 to the consolidated financial statements for additional information.

 

Net realized investment gains/losses—Net realized investment losses totaled $18.9 million in 2002, compared with gains of $6.6 million in 2001 and $1.9 million in 2000. The current year investment losses included a $13.6 million loss resulting from the write-down of WorldCom bonds; a $2.6 million loss associated with the sale of the Company’s subsidiary, FASTRAC Systems, Inc.; and $2.3 million of losses due to the restructuring of the 1031 tax-deferred exchange investment portfolio, which is managed by the Company’s capital management division.

 

20


 

Salaries and other personnel costs—A summary by segment of the Company’s salaries and other personnel costs is as follows:

 

    

2002


  

%


  

2001


  

%


  

2000


    

%


    

(in thousands, except percentages)

Financial Services:

                                     

Title Insurance

  

$

1,076,727

  

71

  

$

893,615

  

71

  

$

721,417

 

  

71

Specialty Insurance

  

 

33,424

  

2

  

 

29,021

  

2

  

 

28,976

 

  

3

Trust and Other Services

  

 

14,260

  

1

  

 

12,234

  

1

  

 

9,882

 

  

1

    

  
  

  
  


  
    

 

1,124,411

  

74

  

 

934,870

  

74

  

 

760,275

 

  

75

    

  
  

  
  


  

Information Technology:

                                     

Mortgage Information

  

 

156,999

  

10

  

 

129,383

  

10

  

 

119,420

 

  

12

Property Information

  

 

102,614

  

7

  

 

95,910

  

8

  

 

81,377

 

  

8

Credit Information

  

 

63,795

  

4

  

 

57,034

  

4

  

 

42,324

 

  

4

Screening Information

  

 

31,985

  

2

  

 

20,795

  

2

  

 

16,056

 

  

1

    

  
  

  
  


  
    

 

355,393

  

23

  

 

303,122

  

24

  

 

259,177

 

  

25

    

  
  

  
  


  

Corporate

  

 

43,391

  

3

  

 

25,459

  

2

  

 

(4,686

)

  

—  

    

  
  

  
  


  
    

$

1,523,195

  

100

  

$

1,263,451

  

100

  

$

1,014,766

 

  

100

    

  
  

  
  


  

 

Financial Services.    The Company’s title insurance segment comprised 95.8% of total salaries and other personnel costs for the Financial Services group. The title insurance segment (primarily direct operations) is labor intensive; accordingly, a major variable expense component is salaries and other personnel costs. This expense component is affected by two competing factors: the need to monitor personnel changes to match corresponding or anticipated new orders, and the need to provide quality service. In addition, this segment’s growth in operations that specialize in builder and lender business has created ongoing fixed costs required to service accounts.

 

Title insurance personnel expenses increased 20.5% in 2002 over 2001 and 23.9% in 2001 over 2000. The increase in 2002 over 2001 was primarily due to $36.1 million of increased employee benefit costs, $28.2 million of personnel costs associated with new acquisitions, $26.5 million in expenses related to the implementation of the Company’s FAST title production system, incremental labor costs incurred to service the increase in business volume and increased commissions associated with the increase in closed orders. The increase in employee benefit costs was primarily due to a $16.9 million increase in the Company match related to the 401(k) plan, which is profit driven and increases as profits escalate; and a $11.5 million increase in health care costs. The increase in 2001 over 2000 was primarily due to an increase in staff in the production area required to service the increase in total order volume, increased commissions associated with the increase in closed orders, $15.6 million of personnel expenses associated with new acquisitions and $3.0 million in severance related to the consolidation of certain back-office functions. The Company’s direct title operations opened 2,184,200, 1,930,300 and 1,240,700 orders in 2002, 2001 and 2000, respectively, representing an increase of 13.2% in 2002 over 2001 and 55.6% in 2001 over 2000. From an efficiency standpoint, title insurance personnel costs as a percentage of title insurance operating revenues (net of agent retention) were 51.2% in 2002, 52.9% in 2001 and 56.6% in 2000.

 

Information Technology.    Personnel expenses in total for the Information Technology group increased 17.2% in 2002 over 2001 and 17.0% in 2001 over 2000. These increases were primarily due to personnel expenses associated with new acquisitions, costs incurred to service the increase in business volume and, in 2002, a $12.6 million increase in employee benefit costs. Personnel costs associated with new acquisitions totaled $19.1 million in 2002 and $13.3 million in 2001. From an efficiency standpoint, personnel costs for the Information Technology group as a percentage of operating revenues were 33.7% in 2002, 35.2% in 2001 and 39.2% in 2000.

 

21


Corporate.    Corporate personnel expenses increased $17.9 million in 2002 over 2001 and $30.1 million in 2001 over 2000. The increase in 2002 over 2001 was primarily attributable to an increase of $13.3 million in employee benefit costs, increased technology personnel costs and higher general costs associated with the support effort needed to service the Company’s expanded national and international operations. The increase in 2001 over 2000 was primarily due to a reduction of $23.7 million in 2000 resulting from the restructuring of the Company’s pension plan.

 

Premiums retained by agents—A summary of agent retention and agent revenues is as follows:

 

    

2002


    

2001


    

2000


 
    

(in thousands, except percentages)

 

Agent retention

  

$

1,292,297

 

  

$

960,215

 

  

$

791,940

 

    


  


  


Agent revenues

  

$

1,589,817

 

  

$

1,185,691

 

  

$

983,937

 

    


  


  


% Retained by agents

  

 

81.3

%

  

 

81.0

%

  

 

80.5

%

    


  


  


 

The premium split between underwriter and agents is in accordance with their respective agency contracts and can vary from region to region due to divergencies in real estate closing practices, as well as rating structures. As a result, the percentage of title premiums retained by agents varies due to the geographical mix of revenues from agency operations.

 

Other operating expenses—A summary by segment of the Company’s other operating expenses is as follows:

 

    

2002


  

%


  

2001


  

%


  

2000


  

%


    

(in thousands, except percentages)

Financial Services:

                                   

Title Insurance

  

$

584,604

  

56

  

$

474,127

  

55

  

$

363,807

  

52

Specialty Insurance

  

 

11,596

  

1

  

 

14,270

  

2

  

 

16,124

  

2

Trust and Other Services

  

 

12,658

  

1

  

 

13,873

  

2

  

 

13,500

  

2

    

  
  

  
  

  
    

 

608,858

  

58

  

 

502,270

  

59

  

 

393,431

  

56

    

  
  

  
  

  

Information Technology:

                                   

Mortgage Information

  

 

159,211

  

15

  

 

140,199

  

16

  

 

121,321

  

17

Property Information

  

 

86,039

  

8

  

 

73,809

  

9

  

 

61,488

  

9

Credit Information

  

 

107,781

  

10

  

 

101,323

  

12

  

 

91,748

  

13

Screening Information

  

 

61,037

  

6

  

 

26,499

  

3

  

 

19,850

  

3

    

  
  

  
  

  
    

 

414,068

  

39

  

 

341,830

  

40

  

 

294,407

  

42

    

  
  

  
  

  

Corporate

  

 

26,199

  

3

  

 

9,504

  

1

  

 

9,834

  

2

    

  
  

  
  

  
    

$

1,049,125

  

100

  

$

853,604

  

100

  

$

697,672

  

100

    

  
  

  
  

  

 

Financial Services.    The Company’s title insurance segment comprised 96.0% of total other operating expenses for the Financial Services group. Title insurance other operating expenses (principally direct operations) increased 23.3% in 2002 over 2001 and 30.3% in 2001 over 2000. These increases were primarily due to incremental costs (i.e., messenger costs, reproduction costs, title plant maintenance costs, etc.) associated with servicing the increases in total order volume and costs associated with new acquisitions. Other operating expenses associated with new acquisitions were $9.6 million in 2002 and $8.8 million in 2001. Title insurance other operating expenses as a percentage of title insurance operating revenues (net of agent retention) were 27.8% in 2002, 28.1% in 2001 and 28.5% in 2000.

 

Information Technology.    Other operating expenses for the Information Technology group increased 21.1% in 2002 over 2001 and 16.1% in 2001 over 2000. These increases were primarily due to costs associated with

 

22


servicing the increases in business volume and costs associated with new acquisitions. Contributing to the increase in 2001 over 2000 were charges of $1.8 million relating to the restructuring of the Company’s field service division and impaired asset write-offs totaling $2.6 million at the appraisal division. Other operating expenses associated with new acquisitions were $57.0 million in 2002 and $31.3 million in 2001. Information Technology other operating expenses as a percentage of operating revenues were 39.3% in 2002, 39.7% in 2001 and 44.5% in 2000.

 

Corporate.    Corporate other operating expenses increased $16.7 million in 2002 over 2001 and remained relatively constant in 2001 compared with 2000. The increase in 2002 over 2001 was primarily due to $15.0 million of technology expenses, primarily consulting and outsourcing costs, required to expand the Company’s e-commerce capabilities, and higher general costs associated with the support effort needed to service the Company’s expanded national and international operations.

 

Provision for title losses and other claims—A summary by segment of the Company’s provision for title losses and other claims is as follows:

 

    

2002


  

%


  

2001


  

%


  

2000


  

%


    

(in thousands, except percentages)

Title Insurance

  

$

135,622

  

60

  

$

113,812

  

63

  

$

75,790

  

54

    

  
  

  
  

  

Specialty Insurance:

                                   

Home Warranty

  

 

50,881

  

23

  

 

47,661

  

26

  

 

42,768

  

30

Property and Casualty Insurance

  

 

26,168

  

12

  

 

10,838

  

6

  

 

13,854

  

10

    

  
  

  
  

  
    

 

77,049

  

35

  

 

58,499

  

32

  

 

56,622

  

40

    

  
  

  
  

  

All other segments

  

 

11,918

  

5

  

 

8,335

  

5

  

 

9,220

  

6

    

  
  

  
  

  
    

$

224,589

  

100

  

$

180,646

  

100

  

$

141,632

  

100

    

  
  

  
  

  

 

The provision for title insurance losses, expressed as a percentage of title insurance operating revenues (excluding the one-time 2001 adjustment mentioned below), was 4.0% in 2002, 4.0% in 2001 and 3.7% in 2000. The increase in 2001 over 2000 reflected adverse claims development, offset, in part, by the shift in current year revenue mix from resale to refinance, which is generally less claims intensive. During the third quarter of 2001, the Company recorded a $7.9 million adjustment to a purchase accounting estimate for loss reserves at one of its title insurance subsidiaries, which was purchased in 1998. This adjustment strengthened loss reserves to reflect subsequent adverse development.

 

The provision for specialty insurance losses reflects home warranty claims and property and casualty insurance claims. The provision for home warranty claims, expressed as a percentage of home warranty operating revenues, was 49.8% in 2002, 53.1% in 2001 and 52.8% in 2000. The rate decrease in 2002 from 2001 was primarily due to a decrease in the average cost per claim, which was primarily due to the elimination of higher-cost contractors that were servicing claims in new geographic areas. These higher-cost contractors in the new geographic areas resulted in the increase in claims rate in 2001 over 2000.

 

The provision for property and casualty insurance claims, expressed as a percentage of property and casualty insurance operating revenues, was 63.8% in 2002, 52.0% in 2001 and 43.7% in 2000. These increases were primarily due to the shift in the lines of property and casualty insurance written from lender-placed insurance, which typically carries lower loss ratios (but higher expense ratios), to preferred homeowner’s insurance, which generally carries higher loss ratios (but lower expense ratios). The Company exited the lender-placed insurance business in 2001.

 

Depreciation and amortization—Depreciation and amortization decreased 10.6% in 2002 from 2001 and increased 25.5% in 2001 over 2000. The decrease in 2002 was primarily due to the elimination of goodwill amortization as a result of implementing SFAS No. 142. See Note 5 to the consolidated financial statements. The increase in 2001 over 2000 was primarily due to an increase in amortization of capitalized data and software, as

 

23


well as increased amortization of goodwill and other intangibles. Depreciation and amortization, as well as capital expenditures, are summarized in Note 20 to the consolidated financial statements.

 

Premium taxes—A summary by pertinent segment of the Company’s premium taxes is as follows:

 

    

2002


  

%


  

2001


  

%


  

2000


  

%


    

(in thousands, except percentages)

Title Insurance

  

$

31,045

  

90

  

$

22,762

  

92

  

$

20,289

  

90

Specialty Insurance

  

 

3,613

  

10

  

 

2,078

  

8

  

 

2,284

  

10

    

  
  

  
  

  
    

$

34,658

  

100

  

$

24,840

  

100

  

$

22,573

  

100

    

  
  

  
  

  

 

Insurers are generally not subject to state income or franchise taxes. However, in lieu thereof, a “premium” tax is imposed on certain operating revenues, as defined by statute. Tax rates and bases vary from state to state; accordingly, the total premium tax burden is dependent upon the geographical mix of operating revenues. The Company’s underwritten title company (noninsurance) subsidiaries are subject to state income tax and do not pay premium tax. Accordingly, the Company’s total tax burden at the state level for the title insurance segment is composed of a combination of premium taxes and state income taxes. Premium taxes as a percentage of title insurance operating revenues remained relatively constant at approximately 1.0%.

 

Interest—Interest expense increased 11.7% in 2002 over 2001 and 18.1% in 2001 over 2000. These increases were primarily due to the issuance of the Company’s $210.0 million senior convertible debentures in April of 2001.

 

Income before income taxes and minority interests—A summary by segment is as follows:

 

    

2002


    

%


  

2001


    

%


  

2000


    

%


    

(in thousands, except percentages)

Financial Services:

                                         

Title Insurance

  

$

271,720

 

  

48

  

$

173,654

 

  

44

  

$

88,091

 

  

48

Specialty Insurance

  

 

24,465

 

  

4

  

 

11,929

 

  

3

  

 

17,048

 

  

9

Trust and Other Services

  

 

13,548

 

  

2

  

 

12,269

 

  

3

  

 

10,350

 

  

6

    


  
  


  
  


  
    

 

309,733

 

  

54

  

 

197,852

 

  

50

  

 

115,489

 

  

63

    


  
  


  
  


  

Information Technology:

                                         

Mortgage Information

  

 

146,849

 

  

26

  

 

129,751

 

  

33

  

 

46,112

 

  

25

Property Information

  

 

71,459

 

  

12

  

 

35,321

 

  

9

  

 

5,998

 

  

3

Credit Information

  

 

39,266

 

  

7

  

 

30,062

 

  

8

  

 

15,278

 

  

8

Screening Information

  

 

2,459

 

  

1

  

 

(286

)

  

0

  

 

1,009

 

  

1

    


  
  


  
  


  
    

 

260,033

 

  

46

  

 

194,848

 

  

50

  

 

68,397

 

  

37

    


  
  


  
  


  
    

 

569,766

 

  

100

  

 

392,700

 

  

100

  

 

183,886

 

  

100

    


  
  


  
  


  

Corporate

  

 

(119,859

)

       

 

(63,160

)

       

 

(30,010

)

    
    


       


       


    
    

$

449,907

 

       

$

329,540

 

       

$

153,876

 

    
    


       


       


    

 

The Company’s title insurance profit margins vary according to a number of factors, including the volume, composition (residential or commercial) and type (resale, refinancing or new construction) of real estate activity. For example, commercial transactions tend to generate higher revenues and greater profit margins than residential transactions. Further, profit margins from refinancing activities are lower than those from resale activities because in many states there are premium discounts on, and cancellation rates are higher for, refinancing transactions. Cancellations of title orders adversely affect profits because costs are incurred in opening and processing such orders, but revenues are not generated. Also, the Company’s direct title insurance business has significant fixed costs in addition to its variable costs. Accordingly, profit margins from the Company’s direct title insurance business improve as the volume of title orders closed increases. Title insurance profit margins are also affected by the percentage of operating revenues generated by agency operations. Profit

 

24


margins from direct operations are generally higher than from agency operations due primarily to the large portion of the premium that is retained by the agent.

 

Most of the businesses that are included in the Information Technology group are database intensive, with a relatively high proportion of fixed costs. As such, profit margins generally improve as revenues increase. Revenues for the mortgage information segment, like title insurance, are primarily dependent on the level of real estate activity and the cost and availability of mortgage funds. Revenues from the property information segment are, in part, dependent on real estate activity, but are less cyclical then title insurance and mortgage information revenues as a result of a significant subscription-based revenue stream. Revenues for the credit information segment are in part impacted by real estate activity, but also by the consumer and automobile sectors.

 

In general, the title insurance business is a lower-margin business when compared with the Company’s other segments. The lower margins reflect the high fixed cost of producing title evidence, whereas the corresponding revenues are subject to regulatory and competitive pricing constraints.

 

Corporate expenses include investment gains and losses, personnel and other operating expenses associated with the Company’s corporate facilities, certain technology initiatives and unallocated interest expense.

 

Income taxes—The Company’s effective income tax rate, which includes a provision for state income and franchise taxes for noninsurance subsidiaries, was 33.3%, 35.7% and 35.5% for 2002, 2001 and 2000, respectively. The differences in the effective tax rate were primarily due to changes in the ratio of permanent differences to income before income taxes and minority interests and changes in state income and franchise taxes resulting from fluctuations in the Company’s noninsurance subsidiaries’ contribution to pretax profits. Information regarding items included in the reconciliation of the effective rate with the federal statutory rate is contained in Note 10 to the consolidated financial statements.

 

Minority interests—Minority interests in net income of consolidated subsidiaries increased $20.9 million in 2002 over 2001 and $27.8 million in 2001 over 2000. These increases were primarily due to the relative increases in the operating results of the Company’s joint venture with Experian.

 

Net income—Net income and per share information are summarized as follows (see Note 11 to the consolidated financial statements):

 

    

2002


  

2001


  

2000


    

(in thousands, except per share amounts)

Net income

  

$

234,367

  

$

167,268

  

$

82,223

    

  

  

Per share of common stock:

                    

Net income:

                    

Basic

  

$

3.27

  

$

2.51

  

$

1.29

    

  

  

Diluted

  

$

2.92

  

$

2.27

  

$

1.24

    

  

  

Weighted-average shares:

                    

Basic

  

 

71,594

  

 

66,568

  

 

63,680

    

  

  

Diluted

  

 

82,567

  

 

75,834

  

 

66,050

    

  

  

 

Liquidity and Capital Resources

 

Cash provided by operating activities amounted to $540.6 million, $388.2 million and $141.4 million for 2002, 2001 and 2000, respectively, after net claim payments of $193.1 million, $153.4 million and $135.4 million, respectively. The principal nonoperating uses of cash and cash equivalents for the three-year period ended December 31, 2002, were for capital expenditures, additions to the investment portfolio, company acquisitions, dividends, distributions to minority shareholders and the repayment of debt. The most significant nonoperating

 

25


sources of cash and cash equivalents were proceeds from the issuance of the Company’s $210.0 million senior convertible debentures in 2001 (see Note 8 to the consolidated financial statements) and proceeds from the sales and maturities of certain investments. The net effect of all activities on total cash and cash equivalents was an increase of $255.6 million for 2002, $344.3 million for 2001 and a decrease of $49.1 million for 2000.

 

On October 12, 2001, the Company entered into a credit agreement that provided for a $200.0 million line of credit. This agreement supercedes the Company’s prior credit agreements and expires in October 2006. Under the terms of the new credit agreement, the Company is required to maintain minimum levels of capital and earnings and meet predetermined debt-to-capitalization ratios. The Company’s line of credit was unused at December 31, 2002.

 

Notes and contracts payable, as a percentage of total capitalization, was 20.7% as of December 31, 2002, as compared with 23.7% as of the prior yearend. This decrease was primarily attributable to the increase in the capital base primarily due to net income for the year. Notes and contracts payable are more fully described in Note 8 to the consolidated financial statements.

 

Off-balance sheet arrangements and contractual obligations.    The Company administers escrow and trust deposits as a service to its customers. Escrow deposits totaled $5.6 billion and $3.0 billion at December 31, 2002 and 2001, respectively, of which $176.6 million and $140.4 million were held at certain of the Company’s subsidiaries. The remaining escrow deposits were held at third-party financial institutions. Trust deposits totaled $1.9 billion and $2.0 billion at December 31, 2002 and 2001, respectively, and were held at the Company’s trust subsidiary. Escrow and trust deposits are not considered assets of the Company and, therefore, are not included in the accompanying consolidated balance sheets. However, the Company remains contingently liable for the disposition of these deposits.

 

In addition, The Company facilitates tax-deferred property exchanges for customers pursuant to Section 1031 of the Internal Revenue Code. As a facilitator and intermediary, the Company holds the proceeds from sales transactions until a qualified acquisition occurs. Like-kind exchange deposits totaled $978.0 million and $804.5 million at December 31, 2002 and 2001, of which $610.8 million and $467.0 million were held by the Company and managed by the Company’s registered investment management subsidiary. The remaining deposits were held at third-party financial institutions. The Company also facilitates tax-deferred reverse exchanges pursuant to Revenue Procedure 2000-37. These exchanges require the Company, using the customer’s funds, to acquire the qualifying property on behalf of the customer and take temporary title to the customer’s property until a qualifying acquisition occurs. Reverse exchange property totaled $154.6 million and $102.5 million at December 31, 2002 and 2001, respectively. Due to the structure utilized to facilitate these transactions, like-kind exchanges and reverse exchanges are not considered assets of the Company and, therefore, are not included in the accompanying consolidated balance sheets. However, the Company remains contingently liable for the transfers of property, disbursements of proceeds and the return on the proceeds at the agreed upon rate.

 

A summary, by due date, of the Company’s total contractual obligations at December 31, 2002, is as follows:

 

      

Notes and

Contracts Payable


  

Operating

Leases


    

Mandatorily

Reedemable

Preferred Securities


  

Total


      

(in thousands)

2003

    

$

33,685

  

$

155,606

    

 

—   

  

$

189,291

2004

    

 

26,855

  

 

133,392

    

 

—  

  

 

160,247

2005

    

 

16,975

  

 

100,597

    

 

—  

  

 

117,572

2006

    

 

10,866

  

 

52,060

    

 

—  

  

 

62,926

2007

    

 

9,767

  

 

43,786

    

 

—  

  

 

53,553

Later Years

    

 

327,557

  

 

40,029

    

$

100,000

  

 

467,586

      

  

    

  

      

$

425,705

  

$

525,470

    

$

100,000

  

$

1,051,175

      

  

    

  

 

 

26


Pursuant to various insurance and other regulations, the maximum amount of dividends, loans and advances available to the Company in 2003 from its insurance subsidiaries is $210.8 million. Such restrictions have not had, nor are they expected to have, an impact on the Company’s ability to meet its cash obligations. See Note 2 to the consolidated financial statements.

 

Due to the Company’s significant liquid-asset position and its consistent ability to generate cash flows from operations, management believes that its resources are sufficient to satisfy its anticipated operational cash requirements. The Company’s financial position will enable management to react to future opportunities for acquisitions or other investments in support of the Company’s continued growth and expansion.

 

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

 

The Company’s primary exposure to market risk relates to interest rate risk associated with certain other financial instruments. Although the Company monitors its risk associated with fluctuations in interest rates, it does not currently use derivative financial instruments to hedge these risks. The table below provides information about certain assets and liabilities that are sensitive to changes in interest rates and presents cash flows and the related weighted average interest rates by expected maturity dates. The Company is also subject to equity price risk as related to its equity securities. At December 31, 2002, the Company had equity securities with a book value of $48.0 million and fair value of $36.9 million. Although the Company has operations in certain foreign countries, these operations, in the aggregate, are not material to the Company’s financial condition or results of operations.

 

   

2003


   

2004


   

2005


   

2006


   

2007


    

Thereafter


   

Total


  

FairValue


 
   

(in thousands)

 

Interest-Rate Sensitive Assets

                                                               

Deposits with Savings and Loan Associations and Banks

                                                               

Book Value

 

$

38,328

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

  

 

—  

 

 

$

38,328

  

$

38,328

 

Average Interest Rate

 

 

1.79

%

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

  

 

—  

 

 

 

—  

  

 

0.00

%

Debt Securities

                                                               

Book Value

 

$

49,020

 

 

$

40,241

 

 

$

15,414

 

 

$

6,625

 

 

$

11,544

 

  

$

171,742

 

 

$

294,586

  

$

309,864

 

Average Interest Rate

 

 

4.75

%

 

 

4.81

%

 

 

5.01

%

 

 

6.10

%

 

 

6.01

%

  

 

6.08

%

 

 

—  

  

 

105.19

%

Loans Receivable

                                                               

Book Value

 

$

1,022

 

 

$

1,045

 

 

$

1

 

 

$

2,899

 

 

$

605

 

  

$

102,590

 

 

$

108,162

  

$

108,440

 

Average Interest Rate

 

 

5.22

%

 

 

9.45

%

 

 

8.75

%

 

 

9.19

%

 

 

6.66

%

  

 

7.78

%

 

 

—  

  

 

100.26

%

Interest-Rate Sensitive Liabilities

                                                               

Variable Rate Demand Deposits

                                                               

Book Value

 

$

20,227

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

  

 

—  

 

 

$

20,227

  

$

20,227

 

Average Interest Rate

 

 

3.77

%

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

  

 

—  

 

        

 

100.00

%

Fixed Rate Demand Deposits

                                                               

Book Value

 

$

43,640

 

 

$

13,817

 

 

$

2,930

 

 

$

852

 

 

$

3,007

 

  

 

—  

 

 

$

64,246

  

$

65,125

 

Average Interest Rate

 

 

3.77

%

 

 

4.36

%

 

 

4.89

%

 

 

5.48

%

 

 

4.92

%

  

 

—  

 

 

 

—  

  

 

101.37

%

Notes and Contracts Payable

                                                               

Book Value

 

$

33,685

 

 

$

26,855

 

 

$

16,975

 

 

$

10,866

 

 

$

9,767

 

  

$

327,557

 

 

$

425,705

  

$

442,376

 

Average Interest Rate

 

 

7.97

%

 

 

7.69

%

 

 

8.34

%

 

 

9.18

%

 

 

8.59

%

  

 

5.54

%

 

 

—  

  

 

103.92

%

Mandatorily Redeemable Preferred Securities

                                                               

Book Value

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

  

$

100,000

 

 

$

100,000

  

$

100,000

 

Average Interest Rate

                                          

 

8.50

%

        

 

100.00

%

 

Item 8.    Financial Statements and Supplementary Data.

 

Separate financial statements for subsidiaries not consolidated and 50% or less owned persons accounted for by the equity method have been omitted because, if considered in the aggregate, they would not constitute a significant subsidiary.

 

27


 

INDEX

 

               

Page No.


Report of Independent Accountants

    

29

Financial Statements:

      
   

Consolidated Balance Sheets

    

30

   

Consolidated Statements of Income and Comprehensive Income

    

31

   

Consolidated Statements of Stockholders’ Equity

    

32

   

Consolidated Statements of Cash Flows

    

33

   

Notes to Consolidated Financial Statements

    

34

Unaudited Quarterly Financial Data

    

58

Financial Statement Schedules:

      
   

I.

  

Summary of Investments – Other than Investments in Related Parties

    

59

   

III.

  

Supplementary Insurance Information

    

60

   

IV.

  

Reinsurance

    

62

   

V.

  

Valuation and Qualifying Accounts

    

63

 

Financial statement schedules not listed are either omitted because they are not applicable or the required information is shown in the consolidated financial statements or in the notes thereto.

 

28


 

REPORT OF INDEPENDENT ACCOUNTANTS

 

To the Board of Directors and Stockholders of

The First American Corporation:

 

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of The First American Corporation and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

As discussed in Note 5 to the financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets.

 

PRICEWATERHOUSECOOPERS LLP

 

San Francisco, California

February 11, 2003

 

29


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

CONSOLIDATED BALANCE SHEETS

 

    

December 31


 
    

2002


    

2001


 

ASSETS


             

Cash and cash equivalents

  

$

900,863,000

 

  

$

645,240,000

 

    


  


Accounts and accrued income receivable, less allowances ($50,782,000 and $39,107,000)

  

 

299,040,000

 

  

 

273,090,000

 

    


  


Investments:

                 

Deposits with savings and loan associations and banks

  

 

38,328,000

 

  

 

27,597,000

 

Debt securities

  

 

309,864,000

 

  

 

257,045,000

 

Equity securities

  

 

36,931,000

 

  

 

52,014,000

 

Other long-term investments

  

 

142,392,000

 

  

 

113,995,000

 

    


  


    

 

527,515,000

 

  

 

450,651,000

 

    


  


Loans receivable

  

 

108,162,000

 

  

 

104,264,000

 

    


  


Property and equipment, at cost:

                 

Land

  

 

43,185,000

 

  

 

43,018,000

 

Buildings

  

 

183,045,000

 

  

 

173,878,000

 

Furniture and equipment

  

 

270,004,000

 

  

 

237,354,000

 

Capitalized software

  

 

284,537,000

 

  

 

247,238,000

 

Less—accumulated depreciation

  

 

(347,695,000

)

  

 

(269,237,000

)

    


  


    

 

433,076,000

 

  

 

432,251,000

 

    


  


Title plants and other indexes

  

 

375,401,000

 

  

 

352,993,000

 

    


  


Deferred income taxes

  

 

20,951,000

 

  

 

5,583,000

 

    


  


Goodwill, net (Note 5)

  

 

563,991,000

 

  

 

435,287,000

 

    


  


Other assets

  

 

169,046,000

 

  

 

137,904,000

 

    


  


    

$

3,398,045,000

 

  

$

2,837,263,000

 

    


  


LIABILITIES AND STOCKHOLDERS’ EQUITY


             

Demand deposits

  

$

84,473,000

 

  

$

91,285,000

 

    


  


Accounts payable and accrued liabilities:

                 

Accounts payable

  

 

51,701,000

 

  

 

30,544,000

 

Salaries and other personnel costs

  

 

165,454,000

 

  

 

124,789,000

 

Pension costs and other retirement plans

  

 

170,327,000

 

  

 

96,409,000

 

Other

  

 

151,587,000

 

  

 

121,428,000

 

    


  


    

 

539,069,000

 

  

 

373,170,000

 

    


  


Deferred revenue

  

 

358,747,000

 

  

 

294,227,000

 

    


  


Reserve for known and incurred but not reported claims

  

 

360,305,000

 

  

 

314,777,000

 

    


  


Income taxes payable

  

 

1,518,000

 

  

 

13,342,000

 

    


  


Notes and contracts payable

  

 

425,705,000

 

  

 

415,341,000

 

    


  


Minority interests in consolidated subsidiaries

  

 

163,639,000

 

  

 

130,669,000

 

    


  


Commitments and contingencies (Note 14)

Mandatorily redeemable preferred securities of the Company’s subsidiary trust whose sole assets are

the Company’s $100,000,000 8.5% Deferrable interest subordinated notes Due 2012

  

 

100,000,000

 

  

 

100,000,000

 

    


  


Stockholders’ equity:

                 

Preferred stock, $1 par value

Authorized—500,000 shares; Outstanding—None

                 

Common stock, $1 par value

Authorized—180,000,000 shares Outstanding—73,636,000 and 68,694,000 shares

  

 

73,636,000

 

  

 

68,694,000

 

Additional paid-in capital

  

 

359,644,000

 

  

 

271,403,000

 

Retained earnings

  

 

987,768,000

 

  

 

777,971,000

 

Accumulated other comprehensive loss

  

 

(56,459,000

)

  

 

(13,616,000

)

    


  


Total stockholders’ equity

  

 

1,364,589,000

 

  

 

1,104,452,000

 

    


  


    

$

3,398,045,000

 

  

$

2,837,263,000

 

    


  


 

See Notes to Consolidated Financial Statements

 

30


 

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 

    

Year Ended December 31


 
    

2002


    

2001


    

2000


 

Revenues:

                          

Operating revenues

  

$

4,633,278,000

 

  

$

3,662,986,000

 

  

$

2,877,528,000

 

Investment and other income

  

 

89,823,000

 

  

 

81,093,000

 

  

 

54,837,000

 

Net realized investment (losses) gains

  

 

(18,892,000

)

  

 

6,644,000

 

  

 

1,890,000

 

    


  


  


    

 

4,704,209,000

 

  

 

3,750,723,000

 

  

 

2,934,255,000

 

    


  


  


Expenses:

                          

Salaries and other personnel costs

  

 

1,523,195,000

 

  

 

1,263,451,000

 

  

 

1,014,766,000

 

Premiums retained by agents

  

 

1,292,297,000

 

  

 

960,215,000

 

  

 

791,940,000

 

Other operating expenses

  

 

1,049,125,000

 

  

 

853,604,000

 

  

 

697,672,000

 

Provision for title losses and other claims

  

 

224,589,000

 

  

 

180,646,000

 

  

 

141,632,000

 

Depreciation and amortization

  

 

96,829,000

 

  

 

108,348,000

 

  

 

86,336,000

 

Premium taxes

  

 

34,658,000

 

  

 

24,840,000

 

  

 

22,573,000

 

Interest

  

 

33,609,000

 

  

 

30,079,000

 

  

 

25,460,000

 

    


  


  


    

 

4,254,302,000

 

  

 

3,421,183,000

 

  

 

2,780,379,000

 

    


  


  


Income before income taxes and minority interests

  

 

449,907,000

 

  

 

329,540,000

 

  

 

153,876,000

 

Income taxes

  

 

149,900,000

 

  

 

117,500,000

 

  

 

54,700,000

 

    


  


  


Income before minority interests

  

 

300,007,000

 

  

 

212,040,000

 

  

 

99,176,000

 

Minority interests

  

 

65,640,000

 

  

 

44,772,000

 

  

 

16,953,000

 

    


  


  


Net income

  

 

234,367,000

 

  

 

167,268,000

 

  

 

82,223,000

 

    


  


  


Other comprehensive (loss) income, net of tax (Note 17):

                          

Unrealized (loss) gain on securities

  

 

(1,199,000

)

  

 

(3,852,000

)

  

 

1,880,000

 

Minimum pension liability adjustment

  

 

(41,644,000

)

  

 

(14,733,000

)

  

 

(1,129,000

)

    


  


  


    

 

(42,843,000

)

  

 

(18,585,000

)

  

 

751,000

 

    


  


  


Comprehensive income

  

$

191,524,000

 

  

$

148,683,000

 

  

$

82,974,000

 

    


  


  


Per share amounts: (Note 11)

                          

Basic

  

$

3.27

 

  

$

2.51

 

  

$

1.29

 

    


  


  


Diluted

  

$

2.92

 

  

$

2.27

 

  

$

1.24

 

    


  


  


Weighted-average common shares outstanding: (Note 11)

                          

Basic

  

 

71,594,000

 

  

 

66,568,000

 

  

 

63,680,000

 

    


  


  


Diluted

  

 

82,567,000

 

  

 

75,834,000

 

  

 

66,050,000

 

    


  


  


 

See Notes to Consolidated Financial Statements

 

31


 

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

 

    

Shares


    

Common

Stock


    

Additional

paid-in

capital


    

Retained

earnings


    

Accumulated

other

comprehensive

income (loss)


    

Total


 

Balance at December 31, 1999

  

65,068,000

 

  

$

65,068,000

 

  

$

184,759,000

 

  

$

561,946,000

 

  

$

4,218,000

 

  

$

815,991,000

 

Net income for 2000

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

82,223,000

 

  

 

—  

 

  

 

82,223,000

 

Cash dividends on common shares

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

(15,256,000

)

  

 

—  

 

  

 

(15,256,000

)

Shares issued in connection with company acquisitions

  

125,000

 

  

 

125,000

 

  

 

2,375,000

 

  

 

—  

 

  

 

—  

 

  

 

2,500,000

 

Shares issued in connection with option, benefit and savings plans

  

474,000

 

  

 

474,000

 

  

 

4,339,000

 

  

 

—  

 

  

 

—  

 

  

 

4,813,000

 

Purchase of Company shares

  

(1,780,000

)

  

 

(1,780,000

)

  

 

(19,005,000

)

  

 

—  

 

  

 

—  

 

  

 

(20,785,000

)

Other comprehensive income

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

751,000

 

  

 

751,000

 

    

  


  


  


  


  


Balance at December 31, 2000

  

63,887,000

 

  

 

63,887,000

 

  

 

172,468,000

 

  

 

628,913,000

 

  

 

4,969,000

 

  

 

870,237,000

 

Net income for 2001

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

167,268,000

 

  

 

—  

 

  

 

167,268,000

 

Cash dividends on common shares

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

(18,210,000

)

  

 

—  

 

  

 

(18,210,000

)

Shares issued in connection with company acquisitions

  

3,510,000

 

  

 

3,510,000

 

  

 

79,304,000

 

  

 

—  

 

  

 

—  

 

  

 

82,814,000

 

Shares issued in connection with option, benefit and savings plans

  

1,337,000

 

  

 

1,337,000

 

  

 

20,556,000

 

  

 

—  

 

  

 

—  

 

  

 

21,893,000

 

Purchase of Company shares

  

(40,000

)

  

 

(40,000

)

  

 

(925,000

)

  

 

—  

 

  

 

—  

 

  

 

(965,000

)

Other comprehensive loss

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(18,585,000

)

  

 

(18,585,000

)

    

  


  


  


  


  


Balance at December 31, 2001

  

68,694,000

 

  

 

68,694,000

 

  

 

271,403,000

 

  

 

777,971,000

 

  

 

(13,616,000

)

  

 

1,104,452,000

 

Net income for 2002

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

234,367,000

 

  

 

—  

 

  

 

234,367,000

 

Cash dividends on common shares

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

(24,570,000

)

  

 

—  

 

  

 

(24,570,000

)

Shares issued in connection with company acquisitions

  

3,094,000

 

  

 

3,094,000

 

  

 

58,257,000

 

  

 

—  

 

  

 

—  

 

  

 

61,351,000

 

Shares issued in connection with option, benefit and savings plans

  

1,848,000

 

  

 

1,848,000

 

  

 

29,984,000

 

  

 

—  

 

  

 

—  

 

  

 

31,832,000

 

Other comprehensive loss

  

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(42,843,000

)

  

 

(42,843,000

)

    

  


  


  


  


  


Balance at December 31, 2002

  

73,636,000

 

  

$

73,636,000

 

  

$

359,644,000

 

  

$

987,768,000

 

  

$

(56,459,000

)

  

$

1,364,589,000

 

    

  


  


  


  


  


 

 

See Notes to Consolidated Financial Statements.

 

32


 

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    

Year Ended December 31


 
    

2002


    

2001


    

2000


 

CASH FLOWS FROM OPERATING ACTIVITIES:

                          

Net income

  

$

234,367,000

 

  

$

167,268,000

 

  

$

82,223,000

 

Adjustments to reconcile net income to cash provided by operating activities:

                          

Provision for title losses and other claims

  

 

224,589,000

 

  

 

180,646,000

 

  

 

141,632,000

 

Depreciation and amortization

  

 

96,829,000

 

  

 

108,348,000

 

  

 

86,336,000

 

Minority interests in net income

  

 

65,640,000

 

  

 

44,772,000

 

  

 

16,953,000

 

Investment losses (gains)

  

 

18,892,000

 

  

 

(6,644,000

)

  

 

(1,890,000

)

Other, net

  

 

(43,337,000

)

  

 

(12,166,000

)

  

 

(1,370,000

)

Changes in assets and liabilities excluding effects of company acquisitions and noncash transactions:

                          

Claims paid, including assets acquired, net of recoveries

  

 

(193,105,000

)

  

 

(153,373,000

)

  

 

(135,398,000

)

Net change in income tax accounts

  

 

(8,376,000

)

  

 

39,232,000

 

  

 

26,447,000

 

Increase in accounts and accrued income receivable

  

 

(17,223,000

)

  

 

(63,668,000

)

  

 

(16,100,000

)

Increase (decrease) in accounts payable and accrued liabilities

  

 

95,531,000

 

  

 

68,920,000

 

  

 

(32,522,000

)

Increase (decrease) in deferred revenue

  

 

66,047,000

 

  

 

30,383,000

 

  

 

(23,325,000

)

Other, net

  

 

753,000

 

  

 

(15,471,000

)

  

 

(1,568,000

)

    


  


  


Cash provided by operating activities

  

 

540,607,000

 

  

 

388,247,000

 

  

 

141,418,000

 

    


  


  


CASH FLOWS FROM INVESTING ACTIVITIES:

                          

Net cash effect of company acquisitions/dispositions

  

 

(51,450,000

)

  

 

(18,935,000

)

  

 

(37,621,000

)

Net (increase) decrease in deposits with banks

  

 

(11,905,000

)

  

 

4,427,000

 

  

 

4,137,000

 

Purchases of debt and equity securities

  

 

(284,776,000

)

  

 

(188,738,000

)

  

 

(41,384,000

)

Proceeds from sales of debt and equity securities

  

 

116,701,000

 

  

 

52,147,000

 

  

 

51,578,000

 

Proceeds from maturities of debt securities

  

 

127,187,000

 

  

 

89,746,000

 

  

 

15,824,000

 

Net decrease in other long-term investments

  

 

24,859,000

 

  

 

13,025,000

 

  

 

2,148,000

 

Net increase in loans receivable

  

 

(3,898,000

)

  

 

(9,812,000

)

  

 

(7,114,000

)

Capital expenditures

  

 

(94,672,000

)

  

 

(129,221,000

)

  

 

(147,041,000

)

Purchases of capitalized data

  

 

(17,745,000

)

  

 

(12,583,000

)

  

 

(11,425,000

)

Net proceeds from sale of property and equipment

  

 

3,661,000

 

  

 

4,299,000

 

  

 

35,940,000

 

    


  


  


Cash used for investing activities

  

 

(192,038,000

)

  

 

(195,645,000

)

  

 

(134,958,000

)

    


  


  


CASH FLOWS FROM FINANCING ACTIVITIES:

                          

Net change in demand deposits

  

 

(6,812,000

)

  

 

9,996,000

 

  

 

446,000

 

Proceeds from issuance of notes

  

 

9,919,000

 

  

 

212,717,000

 

  

 

3,340,000

 

Repayment of debt

  

 

(40,414,000

)

  

 

(34,235,000

)

  

 

(25,401,000

)

Purchase of Company shares

  

 

—  

 

  

 

(965,000

)

  

 

(20,785,000

)

Proceeds from exercise of stock options

  

 

8,401,000

 

  

 

10,566,000

 

  

 

3,560,000

 

Proceeds from issuance of stock to employee benefit plans

  

 

4,433,000

 

  

 

160,000

 

  

 

—  

 

Contributions from minority shareholders

  

 

—  

 

  

 

—  

 

  

 

4,500,000

 

Distributions to minority shareholders

  

 

(43,903,000

)

  

 

(28,296,000

)

  

 

(5,969,000

)

Cash dividends

  

 

(24,570,000

)

  

 

(18,210,000

)

  

 

(15,256,000

)

    


  


  


Cash (used for) provided by financing activities

  

 

(92,946,000

)

  

 

151,733,000

 

  

 

(55,565,000

)

    


  


  


Net increase (decrease) in cash and cash equivalents

  

 

255,623,000

 

  

 

344,335,000

 

  

 

(49,105,000

)

Cash and cash equivalents—Beginning of year

  

 

645,240,000

 

  

 

300,905,000

 

  

 

350,010,000

 

    


  


  


Cash and cash equivalents—End of year

  

$

900,863,000

 

  

$

645,240,000

 

  

$

300,905,000

 

    


  


  


SUPPLEMENTAL INFORMATION:

                          

Cash paid during the year for:

                          

Interest

  

$

33,281,000

 

  

$

28,323,000

 

  

$

24,618,000

 

Premium taxes

  

$

30,655,000

 

  

$

20,349,000

 

  

$

22,867,000

 

Income taxes

  

$

157,528,000

 

  

$

93,361,000

 

  

$

38,842,000

 

Noncash investing and financing activities:

                          

Shares issued for benefits plans

  

$

18,998,000

 

  

$

11,167,000

 

  

$

1,253,000

 

Company acquisitions in exchange for common stock

  

$

61,351,000

 

  

$

82,814,000

 

  

$

2,500,000

 

Purchase of minority interest

  

 

—  

 

  

$

1,322,000

 

  

$

12,804,000

 

Liabilities in connection with company acquisitions

  

$

55,761,000

 

  

$

34,596,000

 

  

$

61,149,000

 

 

See Notes to Consolidated Financial Statements

 

33


 

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1.    Description of the Company:

 

The First American Corporation (the Company), through its subsidiaries, is engaged in the business of providing business information and related products and services. The Company has seven reporting segments that fall within two primary business groups, financial services and information technology. The Financial Services group includes title insurance and services, specialty insurance, and trust and other services. The title insurance and services segment issues residential and commercial title insurance policies, provides escrow services, equity loan services, tax-deferred exchanges and other related products. The specialty insurance segment issues property and casualty insurance policies and provides home warranties. The trust and other services segment provides investment advisory and trust and thrift services. The Information Technology group includes mortgage information, property information, credit information and screening information. The mortgage information segment provides tax monitoring, flood certification, default management services, mortgage loan servicing systems, mortgage document preparation and other real estate related services. The property information segment provides property database services and appraisal services. The credit information segment provides mortgage credit and specialized credit reporting services. The screening information segment provides resident screening, pre-employment screening, substance abuse management and testing, and motor vehicle reporting.

 

Significant Accounting Policies:

 

Principles of consolidation

 

The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Certain 2000 and 2001 amounts have been reclassified to conform with the 2002 presentation. In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). This interpretation requires the consolidation of variable interest entities created or acquired after January 31, 2003, if certain conditions are met. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company’s management is in the process of assessing the impact of implementing FIN 46 on the Company’s financial condition and results of operations.

 

Cash equivalents

 

The Company considers cash equivalents to be all short-term investments that have an initial maturity of 90 days or less and are not restricted for statutory deposit or premium reserve requirements. The carrying amount for cash equivalents is a reasonable estimate of fair value due to the short-term maturity of these investments.

 

Investments

 

Deposits with savings and loan associations and banks are short-term investments with initial maturities of more than 90 days. The carrying amount of these investments is a reasonable estimate of fair value due to their short-term nature.

 

Debt securities are carried at fair value and consist primarily of investments in obligations of the United States Treasury, various corporations and certain state and political subdivisions.

 

Equity securities are carried at fair value and consist primarily of investments in marketable common stocks of corporate entities.

 

34


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Other long-term investments consist primarily of investments in affiliates, which are accounted for under the equity method of accounting; and notes receivable and other investments, which are carried at the lower of cost or fair value less costs to sell.

 

The Company classifies its debt and equity securities portfolio as available-for-sale and, accordingly, includes unrealized gains and losses, net of related tax effects, as a component of other comprehensive income. Realized gains and losses on investments are determined using the specific-identification method.

 

Property and equipment

 

Property and equipment includes computer software acquired and developed for internal use and for use with the Company’s products. Software development costs are capitalized from the time technological feasibility is established until the software is ready for use.

 

Effective January 1, 1999, the Company adopted Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 requires the Company to capitalize interest costs incurred and certain payroll-related costs of employees directly associated with developing software, in addition to incremental payments to third parties. The adoption of SOP 98-1 did not have a material effect on the Company’s financial condition or results of operations.

 

Depreciation on buildings and on furniture and equipment is computed using the straight-line method over estimated useful lives of 25 to 45 and 3 to 10 years, respectively. Capitalized software costs are amortized using the straight-line method over estimated useful lives of 3 to 10 years.

 

Title plants and other indexes

 

Title plants and other indexes include the Company’s title plants, flood zone databases and capitalized real estate data. Title plants and flood zone databases are carried at original cost, with the costs of daily maintenance (updating) charged to expense as incurred. Because properly maintained title plants and flood zone databases have indefinite lives and do not diminish in value with the passage of time, no provision has been made for depreciation or amortization. Capitalized real estate data, which is primarily used by the Company’s property information segment, is amortized using the straight-line method over estimated useful lives of 5 to 15 years.

 

Assets acquired in connection with claim settlements

 

In connection with settlement of title insurance and other claims, the Company sometimes purchases mortgages, deeds of trust, real property or judgment liens. These assets, sometimes referred to as “salvage assets,” are carried at the lower of cost or fair value less costs to sell and are included in “Other assets” in the Company’s consolidated balance sheets. The balance for these assets was $41.6 million and $29.4 million at December 31, 2002 and 2001, respectively.

 

Goodwill

 

On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). This statement addresses financial accounting and reporting for goodwill and other intangible assets. In accordance with the provisions of SFAS 142, goodwill is no longer amortized but is rather tested annually for impairment. The Company has selected September 30 as the annual valuation date to test goodwill for impairment.

 

35


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Impairment of long-lived assets and loans receivable

 

On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets” (SFAS 144). This standard requires that the Company test long-lived assets for impairment whenever there are recognized events or changes in circumstances that could affect the carrying value of the long-lived assets. In accordance with SFAS 144, management uses estimated expected future cash flows (undiscounted and excluding interest costs) to measure the recoverability of long-lived assets held and used. As of December 31, 2002 and 2001, no indications of impairment were identified. SFAS 144 also requires that long-lived assets classified as for sale be carried at the lower of cost or market as of the date that the criteria established by SFAS 144 have been met. As of December 31, 2002 and 2001, no long-lived assets were classified as for sale.

 

Loans receivable are impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans receivable are measured at the present value of expected future cash flows discounted at the loan’s effective interest rate. As a practical expedient, the loan may be valued based on its observable market price or the fair value of the collateral, if the loan is collateral-dependent.

 

Reserve for known and incurred but not reported claims

 

The Company provides for title insurance and property and casualty insurance losses based upon its historical experience by a charge to expense when the related premium revenue is recognized. Title insurance losses and other claims associated with ceded reinsurance are provided for as the Company remains contingently liable in the event that the reinsurer does not satisfy its obligations.

 

The Company provides for claims losses relating to its home warranty business based on the average cost per claim as applied to the total of new claims incurred. The average cost per home warranty claim is calculated using the average of the most recent 12 months of claims experience.

 

The reserve for known and incurred but not reported claims reflects management’s best estimate of the total costs required to settle all claims reported to the Company and claims incurred but not reported. The process applied to estimate claim costs is subject to many variables, including, for title insurance, changes and trends in the type of title insurance policies issued, the real estate market and the interest rate environment. Management monitors the adequacy of the estimated loss reserves on a quarterly basis using a variety of techniques, including actuarial models, and adjusts the loss rates as necessary.

 

Operating revenues

 

Financial Services GroupTitle premiums on policies issued directly by the Company are recognized on the effective date of the title policy and escrow fees are recorded upon close of the escrow. Revenues from title policies issued by independent agents are recorded when notice of issuance is received from the agent.

 

Revenues from home warranty contracts are recognized ratably over the 12-month duration of the contracts. Revenues from property and casualty insurance policies are recognized ratably over the 12-month duration of the policies.

 

Interest on loans with the Company’s thrift subsidiary is recognized on the outstanding principal balance on the accrual basis. Loan origination fees and related direct loan origination costs are deferred and recognized over the life of the loan. Revenues earned by the other products in the trust and other services segment are recognized at the time of delivery, as the Company has no significant ongoing obligation after delivery.

 

36


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Information Technology GroupIn December 1999, the Company adopted Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (SAB). The SAB, which became effective January 1, 1999, applies to the Company’s tax service operations and requires the deferral of the tax service fee and the recognition of that fee as revenue ratably over the expected service period. The amortization rates applied to recognize the revenues assume a 10-year contract life and are adjusted to reflect prepayments. The Company reviews its tax service contract portfolio quarterly to determine if there have been changes in contract lives and/or changes in the number and/or timing of prepayments. Accordingly, the Company may adjust the rates to reflect current trends. Revenues earned by the other products in the Information Technology group are recognized at the time of delivery, as the Company has no significant ongoing obligation after delivery.

 

Premium taxes

 

Title insurance, property and casualty insurance and home warranty companies, like other types of insurers, are generally not subject to state income or franchise taxes. However, in lieu thereof, most states impose a tax based primarily on insurance premiums written. This premium tax is reported as a separate line item in the consolidated statements of income in order to provide a more meaningful disclosure of the taxation of the Company.

 

Income taxes

 

Taxes are based on income for financial reporting purposes and include deferred taxes applicable to temporary differences between the financial statement carrying amount and the tax basis of certain of the Company’s assets and liabilities.

 

Earnings per share

 

Basic earnings per share are computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that net income is increased by the effect of interest expense, net of tax, on the Company’s convertible debt; and the weighted-average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if dilutive stock options had been exercised and the debt had been converted.

 

Risk of real estate market

 

Real estate activity is cyclical in nature and is affected greatly by the cost and availability of long-term mortgage funds. Real estate activity and, in turn, the majority of the Company’s revenues can be adversely affected during periods of high interest rates and/or limited money supply.

 

Use of estimates

 

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the statements. Actual results could differ from the estimates and assumptions used.

 

Escrow and trust deposits

 

The Company administers escrow and trust deposits as a service to its customers. Escrow deposits totaled $5.6 billion and $3.0 billion at December 31, 2002 and 2001, respectively, of which $176.6 million and

 

37


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

$140.4 million were held at certain of the Company’s subsidiaries. The remaining escrow deposits were held at third party financial institutions. Trust deposits totaled $1.9 billion and $2.0 billion at December 31, 2002 and 2001, respectively, and were held at the Company’s trust subsidiary. Escrow and trust deposits are not considered assets of the Company and, therefore, are not included in the accompanying consolidated balance sheets. However, the Company remains contingently liable for the disposition of these deposits.

 

Like-kind exchanges

 

The Company facilitates tax deferred property exchanges for customers pursuant to Section 1031 of the Internal Revenue Code. As a facilitator and intermediary, the Company holds the proceeds from sales transactions until a qualified acquisition occurs. Like-kind exchange deposits totaled $978.0 million and $804.5 million at December 31, 2002 and 2001, respectively, of which $610.8 million and $467.0 million were held by the Company and managed by the Company’s registered investment management subsidiary. The remaining deposits were held at third-party financial institutions. The Company also facilitates tax-deferred reverse exchanges pursuant to Revenue Procedure 2000-37. These exchanges require the Company, using the customer’s funds, to acquire the qualifying property on behalf of the customer and take temporary title to the customer’s property until a qualifying acquisition occurs. Reverse exchange property totaled $154.6 million and $102.5 million at December 31, 2002 and 2001, respectively. Due to the structure utilized to facilitate these transactions, like-kind exchanges and reverse exchanges are not considered assets of the Company and, therefore, are not included in the accompanying consolidated balance sheets. However, the Company remains contingently liable for the transfers of property, disbursements of proceeds and the return on the proceeds at the agreed upon rate.

 

NOTE 2.    Statutory Restrictions on Investments and Stockholders’ Equity:

 

Investments carried at $22.7 million were on deposit with state treasurers in accordance with statutory requirements for the protection of policyholders at December 31, 2002.

 

Pursuant to insurance and other regulations of the various states in which the Company’s insurance subsidiaries operate, the amount of dividends, loans and advances available to the Company is limited, principally for the protection of policyholders. Under such statutory regulations, the maximum amount of dividends, loans and advances available to the Company from its insurance subsidiaries in 2003 is $210.8 million.

 

The Company’s title insurance subsidiary, First American Title Insurance Company, maintained statutory capital and surplus of $651.3 million and $534.2 million at December 31, 2002 and 2001, respectively. Statutory net income for the years ended December 31, 2002, 2001 and 2000, was $132.0 million, $118.7 million and $54.8 million, respectively.

 

The National Association of Insurance Commissioners established certain statutory accounting practices, which became effective January 1, 2001. Adoption of the practices did not have a material impact on the Company’s statutory financial condition or results of operations.

 

38


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

NOTE 3.    Debt and Equity Securities:

 

The amortized cost and estimated fair value of investments in debt securities are as follows:

 

    

Amortized

Cost


  

Gross unrealized


    

Estimated

fair value


       

gains


  

losses


    
    

(in thousands)

December 31, 2002

                             

U.S. Treasury securities

  

$

31,190

  

$

2,256

  

 

—  

 

  

$

33,446

Corporate securities

  

 

155,683

  

 

9,400

  

$

(700

)

  

 

164,383

Obligations of states and political subdivisions

  

 

72,525

  

 

3,251

  

 

(257

)

  

 

75,519

Mortgage-backed securities

  

 

35,188

  

 

1,405

  

 

(77

)

  

 

36,516

    

  

  


  

    

$

294,586

  

$

16,312

  

$

(1,034

)

  

$

309,864

    

  

  


  

December 31, 2001

                             

U.S. Treasury securities

  

$

30,665

  

$

1,525

  

$

(111

)

  

$

32,079

Corporate securities

  

 

142,476

  

 

3,352

  

 

(1,161

)

  

 

144,667

Obligations of states and political subdivisions

  

 

38,904

  

 

631

  

 

(175

)

  

 

39,360

Mortgage-backed securities

  

 

40,859

  

 

120

  

 

(40

)

  

 

40,939

    

  

  


  

    

$

252,904

  

$

5,628

  

$

(1,487

)

  

$

257,045

    

  

  


  

 

The amortized cost and estimated fair value of debt securities at December 31, 2002, by contractual maturities, are as follows:

 

    

Amortized

cost


  

Estimated

fair value


    

(in thousands)

Due in one year or less

  

$

49,020

  

$

50,567

Due after one year through five years

  

 

73,824

  

 

78,295

Due after five years through ten years

  

 

85,813

  

 

91,988

Due after ten years

  

 

50,741

  

 

52,498

    

  

    

 

259,398

  

 

273,348

Mortgage-backed securities

  

 

35,188

  

 

36,516

    

  

    

$

294,586

  

$

309,864

    

  

 

39


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

The cost and estimated fair value of investments in equity securities are as follows:

 

         

Gross unrealized


    

Estimated

fair value


    

Cost


  

gains


  

losses


    
    

(in thousands)

December 31, 2002

                             

Preferred stock:

                             

Other

  

$

4,085

  

$

56

  

$

(168

)

  

$

3,973

Common stocks:

                             

Corporate securities

  

 

43,079

  

 

5,164

  

 

(15,979

)

  

 

32,264

Other

  

 

882

  

 

24

  

 

(212

)

  

 

694

    

  

  


  

    

$

48,046

  

$

5,244

  

$

(16,359

)

  

$

36,931

    

  

  


  

December 31, 2001

                             

Preferred stock:

                             

Other

  

$

3,965

  

$

23

  

$

(221

)

  

$

3,767

Common stocks:

                             

Corporate securities

  

 

47,947

  

 

10,433

  

 

(10,253

)

  

 

48,127

Other

  

 

108

  

 

12

  

 

—  

 

  

 

120

    

  

  


  

    

$

52,020

  

$

10,468

  

$

(10,474

)

  

$

52,014

    

  

  


  

 

The fair value of debt and equity securities was estimated using quoted market prices. Sales of debt and equity securities resulted in realized gains of $2.2 million, $0.6 million and $2.2 million; and realized losses of $4.8 million, $0.6 million and $4.8 million for the years ended December 31, 2002, 2001 and 2000, respectively.

 

NOTE 4.    Loans Receivable:

 

Loans receivable are summarized as follows:

 

    

December 31


 
    

2002


    

2001


 
    

(in thousands)

 

Real estate—mortgage

  

$

113,853

 

  

$

107,799

 

Other

  

 

25

 

  

 

42

 

    


  


    

 

113,878

 

  

 

107,841

 

Unearned income on lease contracts

  

 

(3

)

  

 

(6

)

Allowance for loan losses

  

 

(1,170

)

  

 

(1,050

)

Participations sold

  

 

(4,361

)

  

 

(2,340

)

Deferred loan fees, net

  

 

(182

)

  

 

(181

)

    


  


    

$

108,162

 

  

$

104,264

 

    


  


 

Real estate loans are collateralized by properties located primarily in Southern California. The average yield on the Company’s loan portfolio was 9% and 10% for the years ended December 31, 2002 and 2001, respectively. Average yields are affected by amortization of discounts on loans purchased from other institutions, prepayment penalties recorded as income, loan fees amortized to income and the market interest rates charged by thrift and loan institutions.

 

40


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The fair value of loans receivable was $108.4 million and $104.3 million at December 31, 2002 and 2001, respectively, and was estimated based on the discounted value of the future cash flows using the current rates being offered for loans with similar terms to borrowers of similar credit quality.

 

The allowance for loan losses is maintained at a level that is considered appropriate by management to provide for known risks in the portfolio.

 

The aggregate annual maturities for loans receivable in each of the five years after December 31, 2002, are as follows:

2003

  

$

1,022

2004

  

$

1,045

2005

  

$

1

2006

  

$

2,899

2007

  

$

605

 

NOTE 5.    Goodwill and Other Intangible Assets:

 

On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). This statement addresses financial accounting and reporting for goodwill and other intangibles and supercedes Accounting Principles Board Opinions No. 17, “Intangible Assets.” SFAS 142 addresses how goodwill and other intangible assets should be accounted for in the financial statements. Pursuant to SFAS 142, the Company’s goodwill and intangible assets that have indefinite lives will not be amortized but rather will be tested at least annually for impairment. SFAS 142 requires that goodwill and other intangible assets be allocated to various reporting units that are either operating segments or one reporting unit below the operating segment. The Company’s reporting units, for purposes of applying the provisions of SFAS 142, are title insurance, home warranty, property and casualty insurance, trust and other services, mortgage origination products and services, mortgage servicing products and services, property information services, conventional credit information, sub-prime credit information, pre-employment and drug screening, tenant screening and motor vehicle reporting.

 

The SFAS 142 impairment testing process includes two phases. The first phase (Test 1) compares the fair value of each reporting unit to its book value. The fair value of each reporting unit is determined by using discounted cash flow analysis, market approach valuations and third-party valuation advisors. If the fair value of the reporting unit exceeds its book value, the goodwill is not considered impaired and no additional analysis is required. However, if the book value is greater than the fair value, a second test (Test 2) must be completed to determine if the fair value of the goodwill exceeds the book value. The fair value of the goodwill is determined by discounted cash flow analysis and appraised values. If the fair value is less than the book value, an impairment is considered to exist and, in the initial year of adoption, will be recorded as a cumulative effect of a change in accounting principle.

 

The Company has determined that its flood zone database, which is included in “Title plants and other indexes,” is an intangible asset with an indefinite life. Accordingly, this asset in not amortized but rather tested annually for impairment by comparing the fair value of the database with its carrying value. In addition, the Company had $30.1 million of intangible assets included in “Other assets” at December 31, 2002, with definite lives ranging from 3 to 7 years. These assets, comprised primarily of customer lists and noncompete agreements, are being amortized in a manner consistent with periods prior to the adoption of SFAS 142.

 

In accordance with the adoption of SFAS 142, the Company completed the transitional goodwill impairment test for all reporting units and determined that each reporting unit had a fair value in excess of carrying value;

 

41


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

therefore, no goodwill impairment was recorded. The annual test for impairment was again performed (using the September 30 valuation date) and the results were the same—each reporting unit had a fair value in excess of carrying value and no goodwill impairment was recorded.

 

A reconciliation of the changes in the carrying amount of net goodwill, by operating segment, as of December 31, 2002, is as follows:

 

    

Balance as of

January 1, 2002


    

Acquired During the Year


    

Impairment Losses


  

Balance as of December 31, 2002


    

(in thousands)

Financial Services

                             

Title Insurance

  

$

131,439

    

$

17,574

    

—  

  

$

149,013

Specialty Insurances

  

 

18,194

    

 

1,600

    

—  

  

 

19,794

Trust and Other Services

  

 

—  

    

 

—  

    

—  

  

 

—  

Information Technology

                             

Mortgage Information

  

 

69,917

    

 

2,506

    

—  

  

 

72,423

Property Information

  

 

92,183

    

 

32,495

    

—  

  

 

124,678

Credit Information

  

 

86,117

    

 

783

    

—  

  

 

86,900

Screening Information

  

 

37,437

    

 

73,746

    

—  

  

 

111,183

    

    

    
  

    

$

435,287

    

$

128,704

    

—  

  

$

563,991

    

    

    
  

 

Pro forma net income and earnings per share, adjusted to add back the amortization of goodwill, net of income taxes, is as follows:

 

    

2002


  

2001


  

2000


    

(in thousand, except per share amounts)

Reported Net Income

  

$

234,367

  

$

167,268

  

$

82,223

Add back: Goodwill amortization

  

 

—  

  

 

15,061

  

 

12,326

    

  

  

Adjusted Net Income

  

$

234,367

  

$

182,329

  

$

94,549

    

  

  

Basic Earnings per Share:

                    

Reported Net Income

  

$

3.27

  

$

2.51

  

$

1.29

Goodwill amortization

  

 

—  

  

 

0.23

  

 

0.19

    

  

  

Adjusted Net Income

  

$

3.27

  

$

2.74

  

$

1.48

    

  

  

Diluted Earnings Per Share:

                    

Reported Net Income

  

$

2.92

  

$

2.27

  

$

1.24

Goodwill amortization

  

 

—  

  

 

0.20

  

 

0.19

    

  

  

Adjusted Net Income

  

$

2.92

  

$

2.47

  

$

1.43

    

  

  

 

42


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

NOTE 6.     Demand Deposits:

 

Passbook and investment certificate accounts are summarized as follows:

 

    

December 31


    

2002


  

2001


    

(in thousands except percentages)

Passbook accounts

  

$

20,227

  

$

15,292

    

  

Certificate accounts:

             

Less than one year

  

 

43,639

  

 

51,351

One to five years

  

 

20,607

  

 

24,642

    

  

    

 

64,246

  

 

75,993

    

  

    

$

84,473

  

$

91,285

    

  

Annualized interest rates:

             

Passbook accounts

  

 

2%-3%

  

 

3%-6%

    

  

Certificate accounts

  

 

2%-7%

  

 

3%-8%

    

  

 

The carrying value of the passbook accounts approximates fair value due to the short-term nature of this liability. The fair value of investment certificate accounts was $65.1 million and $77.0 million at December 31, 2002 and 2001, respectively, and was estimated based on the discounted value of future cash flows using a discount rate approximating current market for similar liabilities.

 

NOTE 7.     Reserve for Known and Incurred But Not Reported Claims:

 

Activity in the reserve for known and incurred but not reported claims is summarized as follows:

 

    

December 31


 
    

2002


    

2001


    

2000


 
    

(in thousands)

 

Balance at beginning of year

  

$

314,777

 

  

$

284,607

 

  

$

273,724

 

    


  


  


Provision related to:

                          

Current year

  

 

224,058

 

  

 

181,346

 

  

 

144,103

 

Prior years

  

 

531

 

  

 

(700

)

  

 

(2,471

)

    


  


  


    

 

224,589

 

  

 

180,646

 

  

 

141,632

 

    


  


  


Payments related to:

                          

Current year

  

 

97,729

 

  

 

90,442

 

  

 

70,985

 

Prior years

  

 

79,888

 

  

 

61,079

 

  

 

63,235

 

    


  


  


    

 

177,617

 

  

 

151,521

 

  

 

134,220

 

    


  


  


Other

  

 

(1,444

)

  

 

1,045

 

  

 

3,471

 

    


  


  


Balance at end of year

  

$

360,305

 

  

$

314,777

 

  

$

284,607

 

    


  


  


 

43


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

“Other” primarily represents reclassifications to the reserve for assets acquired in connection with claim settlements and purchase accounting adjustments related to company acquisitions. Claims activity associated with reinsurance is not material and, therefore, not presented separately. Current year payments include $79.8 million, $69.1 million and $61.0 million in 2002, 2001 and 2000, respectively, that relate to the Company’s non-title insurance operations.

 

NOTE 8.     Notes and Contracts Payable:

 

    

December 31


    

2002


  

2001


    

(in thousands)

4.5% senior convertible debentures, due April 2008

  

$

210,000

  

$

210,000

7.55% senior debentures, due April 2028

  

 

99,540

  

 

99,522

Other notes and contracts payable with maturities through 2009, average rate of 7.0%

  

 

116,165

  

 

105,819

    

  

    

$

425,705

  

$

415,341

    

  

 

In April 2001, the Company sold $210.0 million of 4.5% senior convertible debentures due 2008. The debentures are convertible into common shares of the Company at $28 per share. The Company may redeem some or all of the senior convertible debentures at any time on or after April 15, 2004. The Company has also issued debt that is convertible into shares of its common stock to finance certain acquisitions. This debt, which is included in “Other notes and contracts payable”, is convertible at the option of each note holder at a conversion price of $30 per share. The balance of this convertible debt was $28.9 million and $33.4 million at December 31, 2002 and 2001, respectively.

 

In October 2001, the Company entered into a credit agreement that provides for a $200.0 million line of credit. This agreement supercedes the Company’s prior credit agreements that were due to expire in July 2002. Under the terms of the credit agreement, the Company is required to maintain minimum levels of capital and earnings and meet predetermined debt-to-capitalization ratios. The line of credit remains in effect until October 2006 and was unused at December 31, 2002 and 2001.

 

The aggregate annual maturities for notes and contracts payable in each of the five years after December 31, 2002, are as follows:

 

Year

  

(in thousands)

2003

  

$

33,685

2004

  

$

26,855

2005

  

$

16,975

2006

  

$

10,866

2007

  

$

9,767

 

The fair value of notes and contracts payable was $442.4 million and $426.6 million at December 31, 2002 and 2001, respectively, and was estimated based on the current rates offered to the Company for debt of the same remaining maturities. The weighted-average interest rate for the Company’s notes and contracts payable was 6.0% at December 31, 2002 and 2001, respectively.

 

44


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

NOTE 9.     Investment and Other Income:

 

The components of investment and other income are as follows:

 

    

2002


  

2001


  

2000


    

(in thousands)

Interest:

                    

Cash equivalents and deposits with savings and loan associations and banks

  

$

7,204

  

$

15,837

  

$

14,319

Debt securities

  

 

19,242

  

 

17,118

  

 

16,426

Other long-term investments

  

 

5,786

  

 

11,826

  

 

10,238

Dividends on marketable equity securities

  

 

1,328

  

 

1,504

  

 

671

Equity in earnings of unconsolidated affiliates

  

 

43,337

  

 

25,013

  

 

1,589

Other

  

 

12,926

  

 

9,795

  

 

11,594

    

  

  

    

$

89,823

  

$

81,093

  

$

54,837

    

  

  

 

NOTE 10.     Income Taxes:

 

Income taxes are summarized as follows:

 

    

2002


    

2001


  

2000


    

(in thousands)

Current:

                      

Federal

  

$

118,748

 

  

$

101,665

  

$

20,906

State

  

 

23,560

 

  

 

9,181

  

 

3,290

Foreign

  

 

2,609

 

  

 

2,136

  

 

1,540

    


  

  

    

 

144,917

 

  

 

112,982

  

 

25,736

    


  

  

Deferred:

                      

Federal

  

 

6,587

 

  

 

3,526

  

 

26,204

State

  

 

(1,604

)

  

 

992

  

 

2,760

    


  

  

    

 

4,983

 

  

 

4,518

  

 

28,964

    


  

  

    

$

149,900

 

  

$

117,500

  

$

54,700

    


  

  

 

Income taxes differ from the amounts computed by applying the federal income tax rate of 35.0%. A reconciliation of this difference is as follows:

 

    

2002


    

2001


    

2000


 
    

(in thousands)

 

Taxes calculated at federal rate

  

$

134,494

 

  

$

99,669

 

  

$

47,923

 

Tax exempt interest income

  

 

(748

)

  

 

(1,291

)

  

 

(908

)

Tax effect of minority interests

  

 

1,837

 

  

 

1,146

 

  

 

823

 

State taxes, net of federal benefit

  

 

13,767

 

  

 

7,430

 

  

 

3,936

 

Exclusion of certain meals and entertainment expenses

  

 

5,222

 

  

 

4,661

 

  

 

4,040

 

Other items, net

  

 

(4,672

)

  

 

5,885

 

  

 

(1,114

)

    


  


  


    

$

149,900

 

  

$

117,500

 

  

$

54,700

 

    


  


  


 

45


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

The primary components of temporary differences that give rise to the Company’s net deferred tax asset are as follows:

 

    

December 31


    

2002


  

2001


    

(in thousands)

Deferred tax assets:

             

Deferred revenue

  

$

87,705

  

$

75,490

Employee benefits

  

 

34,993

  

 

34,127

Bad debt reserves

  

 

16,531

  

 

12,901

Loss reserves

  

 

14,044

  

 

11,876

Accumulated other comprehensive income

  

 

26,613

  

 

7,332

Net operating loss carryforward

  

 

6,216

  

 

—  

Other

  

 

5,920

  

 

9,932

    

  

    

 

192,022

  

 

151,658

    

  

Deferred tax liabilities:

             

Depreciable and amortizable assets

  

 

112,177

  

 

97,129

Investment gain

  

 

17,418

  

 

17,072

Claims and related salvage

  

 

39,424

  

 

28,353

Other

  

 

2,052

  

 

3,521

    

  

    

 

171,071

  

 

146,075

    

  

Net deferred tax asset

  

$

20,951

  

$

5,583

    

  

 

For the year 2002, domestic and foreign pretax income from continuing operations was $381.6 million and $2.7 million, respectively.

 

The exercise of stock options represents a tax benefit and has been reflected as a reduction of taxes payable and an increase to the additional paid-in capital account. The benefits recorded were $1.5 million, $2.6 million and $1.0 million for the years ended December 31, 2002, 2001 and 2000, respectively.

 

At December 31, 2002, the Company had available net operating loss carryforwards totaling approximately $17.7 million for income tax purposes, of which $5.5 million has an indefinite expiration. The remaining $12.2 million expires between the years 2012 and 2021.

 

46


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

NOTE 11.    Earnings Per Share:

 

The Company’s potential dilutive shares are stock options and convertible debt. Stock options are reflected in diluted earnings per share by application of the treasury-stock method and convertible debt is reflected in diluted earnings per share by application of the if-converted method. A reconciliation of net income and weighted average shares outstanding is as follows:

 

    

2002


  

2001


  

2000


    

(in thousands)

Numerator:

                    

Net income—numerator for basic net income per share

  

$

234,367

  

$

167,268

  

$

82,223

Effect of dilutive securities:

                    

Convertible debt—interest expense (net of tax)

  

 

7,017

  

 

5,247

  

 

—  

    

  

  

Numerator for dilutive net income per share

  

$

241,384

  

$

172,515

  

$

82,223

    

  

  

Denominator

                    

Weighted-average shares—denominator

                    

For basic net income per share

  

 

71,594

  

 

66,568

  

 

63,680

Effect of dilutive securities:

                    

Employee stock options

  

 

2,436

  

 

3,073

  

 

2,370

Convertible debt

  

 

8,537

  

 

6,193

  

 

—  

    

  

  

Denominator for diluted net income per share

  

 

82,567

  

 

75,834

  

 

66,050

    

  

  

Net income per share:

                    

Basic

  

$

3.27

  

$

2.51

  

$

1.29

    

  

  

Diluted

  

$

2.92

  

$

2.27

  

$

1.24

    

  

  

 

For the three years ended December 31, 2002, 2001 and 2000, 3.6 million, 2.8 million and 4.5 million options, respectively, were excluded from the weighted-average diluted common shares outstanding due to their antidilutive effect.

 

NOTE 12.    Employee Benefit Plans:

 

The Company has pension and other retirement benefit plans covering substantially all employees. The Company’s principal pension plan is a noncontributory, qualified, defined benefit plan with benefits based on the employee’s years of service and the highest five consecutive years’ compensation during the last ten years of employment. The Company’s policy is to fund all accrued pension costs. Contributions are intended to provide not only for benefits attributable to past service, but also for those benefits expected to be earned in the future. In December 2000, the Company amended its principal pension plan and certain other retirement plans. The primary impact of the amendment was to reduce future benefits accrued by employees by limiting credit for pay increases through December 31, 2001, and by limiting credit for years of service through December 31, 2005. As a result of amending the plans, the Company reduced its pension expense in 2000 by $5.0 million and recognized a one-time benefit of $34.3 million. The Company also has nonqualified, unfunded supplemental benefit plans covering certain key management personnel. Benefits under these plans are intended to be funded with proceeds from life insurance policies purchased by the Company on the lives of the executives.

 

47


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Net periodic pension costs for the Company’s pension and other retirement benefit plans includes the following components:

 

    

2002


    

2001


    

2000


 
    

(in thousands)

 

Expense:

                          

Service costs

  

$

19,625

 

  

$

17,015

 

  

$

23,082

 

Interest costs

  

 

18,193

 

  

 

15,737

 

  

 

17,110

 

Actual return on plan assets

  

 

(14,795

)

  

 

(15,926

)

  

 

(15,379

)

Amortization of net transition obligation

  

 

(22

)

  

 

309

 

  

 

309

 

Amortization of prior service costs

  

 

(3,632

)

  

 

(3,632

)

  

 

144

 

Amortization of net loss

  

 

2,707

 

  

 

742

 

  

 

783

 

Curtailment gain

  

 

—  

 

  

 

—  

 

  

 

(34,291

)

    


  


  


    

$

22,076

 

  

$

14,245

 

  

$

(8,242

)

    


  


  


 

A reconciliation of benefit obligations, plan assets and funded status of the plans is as follows:

 

    

December 31


 
    

2002


    

2001


 
    

Funded

Pension

Plans


    

Unfunded

Supplemental

Benefit Plans


    

Funded

Pension

Plans


    

Unfunded

Supplemental

Benefit Plans


 
           
           
           
    

(in thousands)

 

Change in benefit obligation:

                                   

Benefit obligation at beginning of year

  

$

183,186

 

  

$

59,393

 

  

$

158,157

 

  

$

52,289

 

Service costs

  

 

17,321

 

  

 

2,304

 

  

 

14,928

 

  

 

2,087

 

Interest costs

  

 

13,484

 

  

 

4,709

 

  

 

11,653

 

  

 

4,084

 

Actuarial losses

  

 

22,910

 

  

 

9,407

 

  

 

8,651

 

  

 

3,470

 

Benefits paid

  

 

(9,888

)

  

 

(2,491

)

  

 

(10,203

)

  

 

(2,537

)

    


  


  


  


Projected benefit obligation at end of year

  

 

227,013

 

  

 

73,322

 

  

 

183,186

 

  

 

59,393

 

    


  


  


  


Change in plan assets:

                                   

Plan assets at fair value at beginning of year

  

 

138,247

 

  

 

—  

 

  

 

159,123

 

  

 

—  

 

Actual return on plan assets

  

 

(12,024

)

  

 

—  

 

  

 

(11,060

)

  

 

—  

 

Company contributions

  

 

31,597

 

  

 

2,491

 

  

 

779

 

  

 

2,537

 

Benefits paid

  

 

(9,888

)

  

 

(2,491

)

  

 

(10,203

)

  

 

(2,537

)

    


  


  


  


Plan assets at fair value at end of year

  

 

147,932

 

  

 

—  

 

  

 

138,639

 

  

 

—  

 

    


  


  


  


Reconciliation of funded status:

                                   

Funded status of the plans

  

 

(79,081

)

  

 

(73,322

)

  

 

(44,547

)

  

 

(59,393

)

Unrecognized net actuarial loss

  

 

93,806

 

  

 

25,476

 

  

 

45,227

 

  

 

17,214

 

Unrecognized prior service costs

  

 

(9,783

)

  

 

818

 

  

 

(13,789

)

  

 

1,193

 

Unrecognized net transition asset

  

 

(28

)

  

 

—  

 

  

 

(50

)

  

 

—  

 

    


  


  


  


Prepaid (accrued) pension cost

  

 

4,914

 

  

 

(47,028

)

  

 

(13,159

)

  

 

(40,986

)

    


  


  


  


Amounts recognized in the consolidated financial statements consist of:

                                   

Accrued benefit liability

  

 

(76,728

)

  

 

(55,328

)

  

 

(35,213

)

  

 

(45,172

)

Intangible asset

  

 

(29

)

  

 

818

 

  

 

(37

)

  

 

1,193

 

Minimum pension liability adjustment

  

 

81,671

 

  

 

7,482

 

  

 

22,091

 

  

 

2,993

 

    


  


  


  


    

$

4,914

 

  

$

(47,028

)

  

$

(13,159

)

  

$

(40,986

)

    


  


  


  


 

48


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

The rate of increase in future compensation levels for the supplemental benefit plan of 4.5% and the weighted-average discount rates of 6.75% and 7.25%, respectively, were used in determining the actuarial present value of the projected benefit obligation at December 31, 2002 and 2001. The majority of pension plan assets are invested in U.S. government securities, time deposits and common stocks with a projected long-term rate of return of 9.0% and 10.0% at December 31, 2002 and 2001, respectively.

 

The Company also has a Stock Bonus Plan (the Plan) for key employees pursuant to which 9,000, 9,000 and 21,000 common shares were issued in 2002, 2001 and 2000, respectively, resulting in a charge to operations of $0.2 million, $0.3 million and $0.2 million, respectively. The Plan, as amended December 9, 1992, provides that a total of up to 1,350,000 common shares may be awarded in any one year.

 

Effective January 1, 1995, the Company adopted The First American Corporation 401(k) Savings Plan (the Savings Plan), which is available to substantially all employees. The Savings Plan allows for employee-elective contributions up to the maximum deductible amount as determined by the Internal Revenue Code. The Company makes contributions to the Savings Plan based on profitability, as well as contributions of the participants. The Company’s expense related to the Savings Plan amounted to $39.6 million, $16.0 million and $9.2 million for the years ended December 31, 2002, 2001 and 2000, respectively. Effective December 1, 2001, the Company merged its Employee Profit Sharing and Stock Ownership Plan, which had been amended effective January 1, 1995, to discontinue future contributions, with the Savings Plan. The merged plans hold 8,906,000 and 8,548,000 shares of the Company’s common stock, representing 12.0% of the total shares outstanding at December 31, 2002 and 2001, respectively.

 

In December 2001, the Company established an employee stock purchase plan under which eligible employees may purchase common stock of the Company at 85% of the closing price on the last day of each month. There were 245,000 and 17,000 shares issued in connection with the plan for the years ending December 31, 2002 and 2001, respectively. At December 31, 2002, there were 2,738,000 shares reserved for future issuances.

 

NOTE 13.    Stock Option Plans:

 

On April 24, 1996, the Company implemented The First American Corporation 1996 Stock Option Plan (the Stock Option Plan). Under the Stock Option Plan, options are granted to certain employees to purchase the Company’s common stock at a price no less than the market value of the shares on the date of the grant. The maximum number of shares that may be subject to options is 14,625,000. Currently, outstanding options become exercisable one to five years, and expire ten years from the grant date. On April 24, 1997, the Company implemented The First American Corporation 1997 Directors’ Stock Plan (the Directors’ Plan). The Directors’ Plan is similar to the employees’ Stock Option Plan, except that the maximum number of shares that may be subject to options is 1,800,000 and the maximum number of shares that may be purchased pursuant to options granted shall not exceed 6,750 shares during any consecutive 12-month period.

 

In May 2001, in connection with the purchase of Credit Management Solutions, Inc. (CMSI), the Company adjusted the outstanding CMSI stock options to substitute common shares of the Company for the shares of CMSI that were issuable upon exercise of those options. The shares and exercise price for the CMSI options were adjusted by an exchange factor, with the result being that the CMSI options became exercisable with respect to 900,000 common shares of the Company at exercise prices ranging from $3.96 to $43.58.

 

In May 1999, in connection with the Company’s business combination with National Information Group (NAIG), which was accounted for under the pooling-of-interests method of accounting, the Company adjusted the outstanding NAIG stock options to substitute Common shares of the Company for the shares of NAIG that

 

49


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

were issuable upon exercise of those options. At December 31, 2002, 62,193 Common shares of the Company were issuable pursuant to exercise of the remaining outstanding adjusted NAIG options with exercise prices ranging from $7.65 to $19.40.

 

Effective December 15, 2002, the Company adopted Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, which amends Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation” (SFAS 148). In accounting for its plans, the Company, as allowable under the provisions of SFAS 148, applies Accounting Principles Board Opinions No. 25, “Accounting for Stock Issued to Employees.” As a result of this election, the Company does not recognize compensation expense for its stock option plans. Had the Company determined compensation cost based on the fair value for its stock options at grant date, net income and earnings per share would have been reduced to the pro forma amounts as follows:

 

    

2002


  

2001


  

2000


    

(in thousands, except per share amounts)

Net income:

                    

As reported

  

$

234,367

  

$

167,268

  

$

82,223

Pro forma

  

$

229,434

  

$

157,609

  

$

72,259

Earnings per share:

                    

As reported

                    

Basic

  

$

3.27

  

$

2.51

  

$

1.29

Diluted

  

$

2.92

  

$

2.27

  

$

1.24

Pro forma

                    

Basic

  

$

3.20

  

$

2.37

  

$

1.13

Diluted

  

$

2.86

  

$

2.08

  

$

1.08

 

The fair value of each option grant is estimated at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2002, 2001 and 2000, respectively; dividend yield of 1.9%, 1.4% and 2.1%; expected volatility of 48.9%, 53.6% and 51.4%; risk-free interest rate of 4.2%, 5.4% and 5.2%; and expected life of seven years, eight years and nine years.

 

50


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Transactions involving stock options are summarized as follows:

 

    

Number outstanding


      

Weighted-average exercise price


    

(in thousands, except

weighted-average exercise price)

Balance at December 31, 1999

  

6,278

 

    

$

17.37

Granted during 2000

  

4,509

 

    

$

12.19

Exercised during 2000

  

(448

)

    

$

8.78

Forfeited during 2000

  

(541

)

    

$

16.36

    

    

Balance at December 31, 2000

  

9,798

 

    

$

15.45

Granted during 2001

  

1,288

 

    

$

18.82

Exercised during 2001

  

(1,009

)

    

$

11.17

Forfeited during 2001

  

(371

)

    

$

18.88

    

    

Balance at December 31, 2001

  

9,706

 

    

$

16.22

Granted during 2002

  

508

 

    

$

17.41

Exercised during 2002

  

(802

)

    

$

11.08

Forfeited during 2002

  

(466

)

    

$

17.73

    

    

Balance at December 31, 2002

  

8,946

 

    

$

16.66

    

    

 

Stock options outstanding and exercisable at December 31, 2002, are summarized as follows:

 

    

Outstanding


  

Exercisable


Range of Exercise Prices


  

Options


    

Average remaining life in years


  

Average exercise price


  

Options


  

Average exercise price


    

(options in thousands)

$  3.95—$  8.95

  

887

    

3.3

  

$

5.82

  

883

  

$

5.82

$  8.96—$13.95

  

2,903

    

7.1

  

$

10.82

  

990

  

$

10.92

$13.96—$20.95

  

1,791

    

7.5

  

$

17.57

  

757

  

$

17.46

$20.96—$43.58

  

3,365

    

5.5

  

$

24.08

  

2,594

  

$

24.02

    
    
  

  
  

$  3.96—$43.58

  

8,946

    

6.2

  

$

16.66

  

5,224

  

$

17.51

    
    
  

  
  

 

NOTE 14.    Commitments and Contingencies:

 

Lease commitments

 

The Company leases certain office facilities, automobiles and equipment under operating leases, which, for the most part, are renewable. The majority of these leases also provide that the Company will pay insurance and taxes. In December 2000, the Company’s subsidiary, First American Real Estate Information Services, Inc. and, in 1999, the Company entered into sale-leaseback agreements with regard to certain furniture and equipment with a net book value of $30.7 million and $65.7 million, respectively. Proceeds from the sales, which amounted to $33.8 million and $80.1 million and gains of $3.1 million and $14.4 million for the years ended December 31, 2000 and 1999, respectively, have been included in “Deferred revenue” and will be amortized over the life of the leases. Under the agreements, the Company’s subsidiary and the Company agreed to lease the equipment for three to five years with minimum annual lease payments of $4.2 million and $9.3 million, respectively. At the end of the term of the leases, the Company has the option to acquire the equipment or return it to the lessor.

 

51


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Future minimum rental payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2002, are as follows:

 

Year


  

(in thousands)

2003

  

$155,606

2004

  

133,392

2005

  

100,597

2006

  

52,060

2007

  

43,786

Later years

  

40,029

    
    

$525,470

    

 

Total rental expense for all operating leases and month-to-month rentals was $178.2 million, $162.5 million and $144.7 million for the years ended December 31, 2002, 2001 and 2000, respectively.

 

Other commitments and guarantees

 

In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others” (FIN 45). This interpretation clarifies the requirements relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of FIN 45 were effective for fiscal years ending after December 15, 2002, and the required disclosures are included in these notes to the consolidated financial statements. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. Management does not believe that adoption of the recognition requirements will have a material impact on its financial condition or results of operations.

 

The Company and Experian Information Solutions, Inc. (Experian) are parties to a joint venture that resulted in the creation of the Company’s First American Real Estate Solutions, LLC (FARES) subsidiary. Pursuant to the terms of the joint venture, Experian has the right to sell to the Company its interest in FARES at a purchase price determined pursuant to a specified formula based on the after-tax earnings of FARES. Experian may only exercise this right if the purchase price is greater than $80.0 million and less than $160.0 million. As of December 31, 2002, the purchase price exceeded $160.0 million and, therefore, Experian’s right was not exercisable as of such date. In addition to the agreement with Experian, the Company is also party to several other agreements that require the Company to purchase some or all of the minority shares of certain less-than-100% owned subsidiaries if certain conditions are met. The total potential purchase price related to those agreements that have met the necessary conditions as of December 31, 2002, was not material.

 

The Company also guarantees the obligations of certain of its subsidiaries. These obligations are included in the Company’s consolidated balance sheets as of December 31, 2002.

 

NOTE 15.   Mandatorily Redeemable Preferred Securities:

 

On April 22, 1997, the Company issued and sold $100.0 million of 8.5% trust preferred securities, due in 2012, through its wholly owned subsidiary, First American Capital Trust. In connection with the subsidiary’s issuance of the preferred securities, the Company issued to the subsidiary trust 8.5% subordinated interest notes due in 2012. The sole assets of the subsidiary are and will be the subordinated interest notes. The Company’s

 

52


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

obligations under the subordinated interest notes and related agreements, taken together, constitute a full and unconditional guarantee by the Company of the subsidiary’s obligations under the preferred securities. Distributions payable on the securities are included as interest expense in the Company’s consolidated income statements.

 

NOTE 16.    Stockholders’ Equity:

 

In December 1999, the Company announced plans to repurchase up to 5.0% of its then issued and outstanding shares. Pursuant to the terms of the repurchase program, the Company repurchased and retired 1,754,000 of its issued and outstanding shares as of December 31, 2000. The Company did not repurchase any shares under this program in 2001 and effectively cancelled the repurchase program as of May 2001.

 

On October 23, 1997, the Company adopted a Shareholder Rights Plan (the Rights Plan). Under the Rights Plan, after the close of business on November 15, 1997, each holder of the Company’s common shares received a dividend distribution of one Right for each common share held. Each Right entitles the holder thereof to buy a preferred share fraction equal to 1/100,000 of a share of Series A Junior Participating Preferred Shares of the Company at an exercise price of $265 per preferred share fraction. Each fraction is designed to be equivalent in voting and dividend rights to one common share.

 

The Rights will be exercisable and will trade separately from the common shares only if a person or group, with certain exceptions, acquires beneficial ownership of 15.0% or more of the Company’s common shares or commences a tender or exchange offer that would result in such person or group beneficially owning 15.0% or more of the common shares then outstanding. The Company may redeem the Rights at $0.001 per Right at any time prior to the occurrence of one of these events. All Rights expire on October 23, 2007.

 

Each Right will entitle its holder to purchase, at the Right’s then-current exercise price, preferred share fractions (or other securities of the Company) having a value of twice the Right’s exercise price. This amounts to the right to buy preferred share fractions of the Company at half price. Rights owned by the party triggering the exercise of Rights will be void and, therefore, will not be exercisable.

 

In addition, if, after any person has become a 15.0%-or-more stockholder, the Company is involved in a merger or other business combination transaction with another person in which the Company’s common shares are changed or converted, or if the Company sells 50.0% or more of its assets or earning power to another person, each Right will entitle its holder to purchase, at the Right’s then-current exercise price, common stock of such other person (or its parent) having a value of twice the Right’s exercise price.

 

 

53


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 17.    Other Comprehensive Income:

 

Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.

 

Components of other comprehensive income are as follows:

 

    

Unrealized gains on securities


    

Minimum pension liability adjustment


    

Accumulated other comprehensive income (loss)


 
    

(in thousands)

 

Balance at December 31, 1999

  

$

4,661

 

  

$

(443

)

  

$

4,218

 

Pretax change

  

 

2,893

 

  

 

(1,738

)

  

 

1,155

 

Tax effect

  

 

(1,013

)

  

 

609

 

  

 

(404

)

    


  


  


Balance at December 31, 2000

  

 

6,541

 

  

 

(1,572

)

  

 

4,969

 

Pretax change

  

 

(5,928

)

  

 

(22,665

)

  

 

(28,593

)

Tax effect

  

 

2,076

 

  

 

7,932

 

  

 

10,008

 

    


  


  


Balance at December 31, 2001

  

 

2,689

 

  

 

(16,305

)

  

 

(13,616

)

Pretax change

  

 

28

 

  

 

(64,068

)

  

 

(64,040

)

Tax effect

  

 

(1,227

)

  

 

22,424

 

  

 

21,197

 

    


  


  


Balance at December 31, 2002

  

$

1,490

 

  

$

(57,949

)

  

$

(56,459

)

    


  


  


 

The change in unrealized gains on debt and equity securities includes reclassification adjustments of $2.6 million and $2.6 million of net realized losses for the years ended December 31, 2002 and 2000, respectively. There were no reclassification adjustments in 2001.

 

NOTE 18.    Litigation.

 

The Company and certain of its subsidiaries on October 2, 2002, settled the lawsuit filed against certain of the Company’s subsidiaries by the state of California in the California state court in Sacramento, California. On or about September 18, 2002, the Company and certain of its subsidiaries settled a related class action lawsuit filed in the state court in the county of Los Angeles, California.

 

These lawsuits involved allegations that certain subsidiaries of the Company and certain of their competitors failed to turn over unclaimed property to the state of California on a timely basis; charged California home buyers and other escrow customers fees for services that were never performed or that cost less than the amount charged; and devised and carried out programs, known as earnings credits, with financial institutions to receive interest on escrow funds placed in demand deposits.

 

Under the terms of the settlements, the Company will pay up to $5.5 million to certain customers in the form of cash refunds and discounts against future title insurance and escrow services. The settlements further require the Company to pay approximately $2.5 million to specified governmental agencies;, counsel to the class action plaintiffs; and the Consumer Protection Prosecution Trust Fund, a trust fund established to assist consumers in protecting their rights.

 

The settlements provide that they do not constitute an admission of liability or wrongdoing by the Company or any of its subsidiaries.

 

54


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

The Company is involved in numerous routine legal proceedings related to its operations. While the ultimate disposition of each proceeding is not determinable, the Company does not believe that any of such proceedings will have a material adverse effect on its financial condition or results of operations.

 

NOTE 19.    Business Combinations:

 

On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 141, “Business Combinations” (SFAS 141). This statement addresses financial accounting and reporting for business combinations and supercedes Accounting Principles Board Opinions No. 16, “Business Combinations.” SFAS 141 requires that all business combinations be accounted for under the purchase method of accounting.

 

During the year ended December 31, 2002, the Company completed 28 acquisitions. In applying the purchase method of accounting, the Company undertakes a comprehensive review of the acquired entity to ensure that all identifiable assets and liabilities are properly recorded at their fair value. In determining fair value, the Company utilizes a variety of valuation techniques, including discounted cash flow analysis and outside appraisals, to the extent necessary, given materiality and complexity. All excess purchase price is appropriately recorded as goodwill. The useful lives for all assets recorded in purchase accounting are based on market conditions, contractual terms and other appropriate factors.

 

The acquisitions were individually not material and are included in the following business segments: 21 in the title insurance and services segment, one in the mortgage information segment, three in the property information segment and three in the screening information segment. Their aggregate purchase price was $51.2 million in cash, $38.8 million in notes and 3,093,976 shares of the Company’s common stock. The purchase price for each was allocated to the assets acquired and liabilities assumed based on estimated fair values and approximately $128.7 million in goodwill was recorded. The operating results of these acquired companies were included in the Company’s consolidated financial statements from their respective acquisition dates.

 

Assuming all of the current year acquisitions had occurred January 1, 2001, pro forma revenues, net income and net income per diluted share would have been $4.75 billion, $234.6 million and $2.88, respectively, for the year ended December 31, 2002; and $3.87 billion, $175.7 million and $2.29, respectively, for the year ended December 31, 2001. All pro forma results include interest expense on acquisition debt. The pro forma results are not necessarily indicative of the operating results that would have been obtained had the acquisitions occurred at the beginning of the periods presented, nor are they necessarily indicative of future operating results.

 

In December 2002, the Company and US SEARCH.com Inc., a provider of location, verification and screening services, signed a definitive agreement to merge their screening businesses and create a new publicly held company that will be named First Advantage Corporation. This new entity will be approximately 80% owned by the Company, with the remainder owned by the shareholders of US SEARCH.com Inc. The Company expects this transaction to close during the second quarter of 2003.

 

NOTE 20.    Segment Financial Information:

 

The Company, through its subsidiaries, is engaged in the business of providing business information and related products and services. The Company has seven reporting segments that fall within two primary business groups, financial services and information technology. The Financial Services group includes title insurance, specialty insurance and trust and other services. The title insurance and services segment issues residential and commercial title insurance policies, provides escrow services, equity loan services, tax-deferred exchanges and other related products. The specialty insurance segment issues property and casualty insurance policies and

 

55


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

provides home warranties. The trust and other services segment provides investment advisory and trust and thrift services. The Information Technology group includes mortgage information, property information, credit information and screening information. The mortgage information segment provides tax monitoring, flood certification, default management services, mortgage loan servicing systems, mortgage document preparation and other real estate related services. The property information segment provides property database services and appraisal services. The credit information segment provides mortgage credit and specialized credit reporting services. The screening information segment provides resident screening, pre-employment screening, substance abuse management and testing and motor vehicle reporting.

 

The Company provides its title services through both direct operations and agents throughout the United States. It also offers title services in Australia, The Bahama Islands, Canada, England, Guam, Ireland, Mexico, Puerto Rico, Scotland, South Korea, the U.S. Virgin Islands and other countries abroad. The international operations account for less than 1% of the Company’s income before income taxes and minority interests. Home warranty services are provided in 27 states throughout the United States. Property and casualty insurance is offered nationwide. Trust and other services products are provided in Southern California. The products offered by the four segments included in the Information Technology group are provided nationwide.

 

Corporate consists primarily of investment gains and losses, personnel and other operating expenses associated with the Company’s corporate facilities, certain technology initiatives and unallocated interest expense.

 

 

56


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Selected financial information about the Company’s operations by segment for each of the past three years is as follows:

 

   

Revenues


    

Depreciation

and

amortization


  

Income (loss)

before income taxes and minority interests


    

Assets


  

Investment in

Affiliates


  

Capital expenditures


   

(in thousands)

2002

                                            

Title Insurance

 

$

3,437,726

 

  

$

42,092

  

$

271,720

 

  

$

1,618,186

  

$

66,939

  

$

45,014

Specialty insurance

 

 

153,205

 

  

 

1,965

  

 

24,465

 

  

 

282,199

  

 

—  

  

 

1,829

Trust and Other Services

 

 

41,687

 

  

 

1,091

  

 

13,548

 

  

 

147,039

  

 

3,558

  

 

299

Mortgage Information

 

 

485,206

 

  

 

10,161

  

 

146,849

 

  

 

433,471

  

 

—  

  

 

12,130

Property Information

 

 

279,754

 

  

 

18,729

  

 

71,459

 

  

 

450,355

  

 

23,787

  

 

14,096

Credit Information

 

 

221,761

 

  

 

11,355

  

 

39,266

 

  

 

161,964

  

 

13,457

  

 

7,732

Screening Information

 

 

100,888

 

  

 

4,050

  

 

2,459

 

  

 

157,051

  

 

—  

  

 

3,964

Corporate

 

 

(16,018

)

  

 

7,386

  

 

(119,859

)

  

 

147,780

  

 

—  

  

 

9,608

   


  

  


  

  

  

   

$

4,704,209

 

  

$

96,829

  

$

449,907

 

  

$

3,398,045

  

$

107,741

  

$

94,672

   


  

  


  

  

  

2001

                                            

Title Insurance

 

$

2,690,677

 

  

$

49,208

  

$

173,654

 

  

$

1,303,832

  

$

49,000

  

$

48,197

Specialty insurance

 

 

120,558

 

  

 

3,671

  

 

11,929

 

  

 

204,326

  

 

—  

  

 

2,383

Trust and Other Services

 

 

39,661

 

  

 

1,173

  

 

12,269

 

  

 

138,899

  

 

3,756

  

 

651

Mortgage Information

 

 

420,118

 

  

 

11,233

  

 

129,751

 

  

 

379,170

  

 

—  

  

 

21,187

Property Information

 

 

227,900

 

  

 

23,355

  

 

35,321

 

  

 

394,197

  

 

26,277

  

 

25,549

Credit Information

 

 

201,029

 

  

 

12,145

  

 

30,062

 

  

 

175,759

  

 

4,947

  

 

17,970

Screening Information

 

 

49,326

 

  

 

1,810

  

 

(286

)

  

 

58,360

  

 

—  

  

 

4,122

Corporate

 

 

1,454

 

  

 

5,753

  

 

(63,160

)

  

 

182,720

  

 

—  

  

 

9,162

   


  

  


  

  

  

   

$

3,750,723

 

  

$

108,348

  

$

329,540

 

  

$

2,837,263

  

$

83,980

  

$

129,221

   


  

  


  

  

  

2000

                                            

Title Insurance

 

$

2,101,571

 

  

$

34,536

  

$

88,091

 

  

$

1,051,214

  

$

40,410

  

$

69,958

Specialty Insurance

 

 

124,450

 

  

 

2,305

  

 

17,048

 

  

 

209,388

  

 

—  

  

 

5,462

Trust and Other Services

 

 

34,914

 

  

 

1,141

  

 

10,350

 

  

 

117,432

  

 

4,158

  

 

2,204

Mortgage Information

 

 

308,525

 

  

 

12,021

  

 

46,112

 

  

 

327,364

  

 

—  

  

 

21,381

Property Information

 

 

173,078

 

  

 

23,128

  

 

5,998

 

  

 

342,330

  

 

18,406

  

 

27,793

Credit Information

 

 

156,855

 

  

 

7,399

  

 

15,278

 

  

 

91,152

  

 

673

  

 

7,660

Screening Information

 

 

38,455

 

  

 

1,248

  

 

1,009

 

  

 

19,684

  

 

—  

  

 

3,612

Corporate

 

 

(3,593

)

  

 

4,558

  

 

(30,010

)

  

 

41,173

  

 

—  

  

 

8,971

   


  

  


  

  

  

   

$

2,934,255

 

  

$

86,336

  

$

153,876

 

  

$

2,199,737

  

$

63,647

  

$

147,041

   


  

  


  

  

  

 

57


THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

QUARTERLY FINANCIAL DATA

(Unaudited)

 

    

Quarter Ended


    

March 31


  

June 30


  

September 30


  

December 31


    

(in thousands, except per share amounts)

Year Ended December 31, 2002

                           

Revenues

  

$

1,042,202

  

$

1,091,530

  

$

1,196,086

  

$

1,374,391

Income before income taxes and minority interests

  

$

88,559

  

$

80,054

  

$

129,022

  

$

152,272

Net income

  

$

44,075

  

$

40,121

  

$

67,359

  

$

82,812

Net income per share:

                           

Basic

  

$

0.63

  

$

0.56

  

$

0.94

  

$

1.13

Diluted

  

$

0.57

  

$

0.51

  

$

0.84

  

$

1.01

    

  

  

  

Year Ended December 31, 2001

                           

Revenues

  

$

766,741

  

$

928,042

  

$

983,008

  

$

1,072,932

Income before income taxes and minority interests

  

$

39,198

  

$

106,332

  

$

83,355

  

$

100,655

Net income

  

$

18,776

  

$

54,517

  

$

41,695

  

$

52,280

Net income per share:

                           

Basic

  

$

0.29

  

$

0.83

  

$

0.61

  

$

0.76

Diluted

  

$

0.27

  

$

0.75

  

$

0.55

  

$

0.68

 

58


 

SCHEDULE I

1 OF 1

 

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

SUMMARY OF INVESTMENTS—OTHER THAN INVESTMENTS IN RELATED PARTIES

 

December 31, 2002

 

Column A


  

Column B


  

Column C


  

Column D


Type of Investment


  

Cost


  

Market Value


  

Amount at which

shown in the

balance sheet


Deposits with savings and loan associations and banks:

                    

Registrant—None

                    

Consolidated

  

$

38,328,000

  

$

38,328,000

  

$

38,328,000

    

  

  

Debt securities:

                    

U.S. Treasury securities

                    

Registrant—None

                    

Consolidated

  

$

31,190,000

  

$

33,446,000

  

$

33,446,000

    

  

  

Corporate securities

                    

Registrant

  

$

40,352,000

  

$

41,478,000

  

$

41,478,000

    

  

  

Consolidated

  

$

155,683,000

  

$

164,383,000

  

$

164,383,000

    

  

  

Obligations of states and political subdivisions

                    

Registrant—None

                    

Consolidated

  

$

72,525,000

  

$

75,519,000

  

$

75,519,000

    

  

  

Mortgage-backed securities

                    

Registrant

  

$

4,869,000

  

$

4,857,000

  

$

4,857,000

    

  

  

Consolidated

  

$

35,188,000

  

$

36,516,000

  

$

36,516,000

    

  

  

Total debt securities:

                    

Registrant

  

$

45,221,000

  

$

46,335,000

  

$

46,335,000

    

  

  

Consolidated

  

$

294,586,000

  

$

309,864,000

  

$

309,864,000

    

  

  

Equity securities:

                    

Registrant—None

                    

Consolidated

  

$

48,046,000

  

$

36,931,000

  

$

36,931,000

    

  

  

Other long-term investments:

                    

Registrant—None

  

$

3,260,000

  

$

3,260,000

  

$

3,260,000

    

  

  

Consolidated

  

$

142,392,000

  

$

142,392,000

  

$

142,392,000

    

  

  

Total Investments:

                    

Registrant

  

$

48,481,000

  

$

49,595,000

  

$

49,595,000

    

  

  

Consolidated

  

$

523,352,000

  

$

527,515,000

  

$

527,515,000

    

  

  

 

59


 

SCHEDULE III

1 OF 2

 

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

SUPPLEMENTARY INSURANCE INFORMATION

 

BALANCE SHEET CAPTIONS

 

Column A


  

Column B


  

Column C


  

Column D


Segment


  

Deferred Policy

Acquisition Costs


  

Claims

Reserves


  

Deferred

Revenues


2002


              

Title Insurance

  

 

—  

  

$

319,826,000

  

$

7,356,000

Specialty Insurance

  

 

22,648,000

  

 

19,021,000

  

 

90,356,000

Trust and Other Services

  

 

—  

  

 

3,000

  

 

—  

Mortgage Information

  

 

—  

  

 

18,373,000

  

 

251,298,000

Property Information

  

 

—  

  

 

3,082,000

  

 

7,576,000

Credit Information

  

 

—  

  

 

—  

  

 

1,938,000

Screening Information

                

 

223,000

Corporate

  

 

—  

  

 

—  

  

 

—  

    

  

  

Total

  

$

22,648,000

  

$

360,305,000

  

$

358,747,000

    

  

  

2001


              

Title Insurance

                

$

9,712,000

Specialty Insurance

                    

Trust and Other Services

                    

Mortgage Information

                    

Property Information

  

 

—  

  

$

283,469,000

  

 

9,713,000

Credit Information

  

 

—  

  

 

18,411,000

  

 

231,551,000

Screening Information

  

$

11,455,000

  

 

12,897,000

  

 

52,963,000

Corporate

  

 

—  

  

 

—  

  

 

—  

    

  

  

Total

  

$

11,455,000

  

$

314,777,000

  

$

294,227,000

    

  

  

 

60


SCHEDULE III

2 OF 2

 

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

SUPPLEMENTARY INSURANCE INFORMATION

 

INCOME STATEMENT CAPTIONS

 

Column A


  

Column F


  

Column G


    

Column H


    

Column I


  

Column J


  

Column K


Segment


  

Operating

Revenues


  

Net

Investment

Income


    

Loss

Provision


    

Amortization

of Deferred

Policy

Acquisition

Costs


  

Other

Operating

Expenses


  

Net

Premiums

Written


2002

                                 

Title Insurance

  

$

3,393,592,000

  

$

44,134,000

 

  

$

135,622,000

 

         

$

584,604,000

      

Specialty Insurance

  

 

143,307,000

  

 

9,898,000

 

  

 

77,049,000

 

  

$

11,313,000

  

 

283,000

  

$

69,411,643

Trust and Other Services

  

 

41,737,000

  

 

(51,000

)

  

 

130,000

 

         

 

12,658,000

      

Mortgage Information

  

 

479,288,000

  

 

5,919,000

 

  

 

11,975,000

 

         

 

159,211,000

      

Property Information

  

 

259,315,000

  

 

20,440,000

 

  

 

150,000

 

         

 

86,039,000

      

Credit Information

  

 

215,337,000

  

 

6,424,000

 

  

 

(348,000

)

         

 

107,781,000

      

Screening Information

  

 

100,702,000

  

 

186,000

 

  

 

11,000

 

         

 

61,037,000

      

Corporate

  

 

—  

  

 

(16,019,000

)

  

 

—  

 

  

 

—  

  

 

26,199,000

  

 

—  

    

  


  


  

  

  

Total

  

$

4,633,278,000

  

$

70,931,000

 

  

$

224,589,000

 

  

$

11,313,000

  

$

1,037,812,000

  

$

69,411,643

    

  


  


  

  

  

2001

                                 

Title Insurance

  

$

2,648,994,000

  

$

41,684,000

 

  

$

113,811,000

 

         

$

474,127,000

      

Specialty Insurance

  

 

112,054,000

  

 

8,504,000

 

  

 

58,499,000

 

  

$

9,365,000

  

 

4,905,000

  

$

16,982,000

Trust and Other Services

  

 

39,882,000

  

 

(221,000

)

  

 

112,000

 

         

 

13,873,000

      

Mortgage Information

  

 

407,006,000

  

 

13,110,000

 

  

 

8,748,000

 

         

 

140,199,000

      

Property Information

  

 

210,975,000

  

 

16,925,000

 

  

 

(1,099,000

)

         

 

73,809,000

      

Credit Information

  

 

194,981,000

  

 

6,048,000

 

  

 

575,000

 

         

 

101,323,000

      

Screening Information

  

 

49,094,000

  

 

233,000

 

  

 

—  

 

         

 

26,499,000

      

Corporate

  

 

—  

  

 

1,454,000

 

  

 

—  

 

  

 

—  

  

 

9,504,000

  

 

—  

    

  


  


  

  

  

Total

  

$

3,662,986,000

  

$

87,737,000

 

  

$

180,646,000

 

  

$

9,365,000

  

$

844,239,000

  

$

16,982,000

    

  


  


  

  

  

2000

                                 

Title Insurance

  

$

2,067,048,000

  

$

34,523,000

 

  

$

75,791,000

 

         

$

363,807,000

      

Specialty Insurance

  

 

115,171,000

  

 

9,280,000

 

  

 

56,622,000

 

  

$

10,856,000

  

 

5,268,000

  

$

27,451,000

Trust and Other Services

  

 

33,635,000

  

 

1,278,000

 

  

 

42,000

 

         

 

13,500,000

      

Mortgage Information

  

 

307,826,000

  

 

699,000

 

  

 

8,671,000

 

         

 

96,488,000

      

Property Information

  

 

161,040,000

  

 

12,038,000

 

  

 

140,000

 

         

 

86,321,000

      

Credit Information

  

 

154,341,000

  

 

2,513,000

 

  

 

366,000

 

         

 

91,749,000

      

Screening Information

  

 

38,466,000

  

 

(11,000

)

  

 

—  

 

         

 

19,850,000

      

Corporate

  

 

—  

  

 

(3,593,000

)

  

 

—  

 

  

 

—  

  

 

9,833,000

  

 

—  

    

  


  


  

  

  

Total

  

$

2,877,527,000

  

$

56,727,000

 

  

$

141,632,000

 

  

$

10,856,000

  

$

686,816,000

  

$

27,451,000

    

  


  


  

  

  

 

61


 

SCHEDULE IV

1 OF 1

 

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

REINSURANCE

 

Segment


  

Insurance operating revenues before reinsurance


  

Ceded to other companies


  

Assumed from other companies


  

Insurance operating revenues


    

Percentage of amount assumed to operating revenues


 

Title Insurance

                            

2002

  

3,395,743,000

  

5,357,000

  

3,206,000

  

3,393,592,000

    

0.1

%

    
  
  
  
    

2001

  

2,651,380,000

  

6,622,000

  

4,236,000

  

2,648,994,000

    

0.2

%

    
  
  
  
    

2000

  

2,066,990,000

  

3,805,000

  

3,864,000

  

2,067,049,000

    

0.2

%

    
  
  
  
    

Specialty Insurance

                            

2002

  

49,497,000

  

8,648,000

  

171,000

  

41,020,000

    

0.4

%

    
  
  
  
    

2001

  

23,086,000

  

2,264,000

  

4,000

  

20,826,000

    

0.0

%

    
  
  
  
    

2000

  

36,767,000

  

5,054,000

  

—  

  

31,713,000

    

0.0

%

    
  
  
  
    

 

62


 

SCHEDULE V

1 OF 3

 

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

VALUATION AND QUALIFYING ACCOUNTS

Year Ended December 31, 2002

 

Column A


  

Column B


  

Column C


      

Column D


      

Column E


         

Additions


                 

Description


  

Balance at

beginning

of period


  

Charged to

costs and

expenses


  

Charged

to other

accounts


      

Deductions

from

reserve


      

Balance

at end

of period


                  
                  

Reserve deducted from accounts receivable:

                                          

Registrant—None

                                          

Consolidated

  

$

39,107,000

  

$

22,061,000

             

$

10,386,000

(A)

    

$

50,782,000

    

  

             


    

Reserve for title losses and other claims:

                                          

Registrant—None

                                          

Consolidated

  

$

314,777,000

  

$

224,589,000

  

$

1,865,000

(B)

    

$

180,926,000

(C)

    

$

360,305,000

    

  

  


    


    

Reserve deducted from loans receivable:

                                          

Registrant—None

                                          

Consolidated

  

$

1,050,000

  

$

123,000

             

$

3,000

(A)

    

$

1,170,000

    

  

             


    

Reserve deducted from assets acquired in connection with claim settlements:

                                          

Registrant—None

                                          

Consolidated

  

$

1,101,000

         

$

137,000

 

    

$

172,000

(D)

    

$

1,066,000

    

         


    


    

Reserve deducted from other assets:

                                          

Registrant—None

                                          

Consolidated

  

$

3,418,000

  

$

200,000

             

$

1,129,000

(D)

    

$

2,489,000

    

  

             


    

 

Note A—Amount represents accounts written off, net of recoveries.

 

Note B—Amount represents net $1,865,000 in purchase accounting adjustments

 

Note C—Amount represents claim payments, net of recoveries.

 

Note D—Amount represents elimination of reserve in connection with disposition and/or revaluation of the related asset.

 

63


 

SCHEDULE V

2 OF 3

 

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

VALUATION AND QUALIFYING ACCOUNTS

Year Ended December 31, 2001

 

Column A


  

Column B


  

Column C


      

Column D


      

Column E


         

Additions


                 

Description


  

Balance at

beginning

of period


  

Charged to

costs and

expenses


  

Charged

to other

accounts


      

Deductions

from

reserve


      

Balance

at end

of period


Reserve deducted from accounts receivable:

                                          

Registrant—None

                                          

Consolidated

  

$

15,477,000

  

$

20,353,000

  

$

3,277,000

 

               

$

39,107,000

    

  

  


               

Reserve for title losses and other claims:

                                          

Registrant—None

                                          

Consolidated

  

$

284,607,000

  

$

180,646,000

  

$

2,383,000

(B)

    

$

152,859,000

(C)

    

$

314,777,000

    

  

  


    


    

Reserve deducted from loans receivable:

                                          

Registrant—None

                                          

Consolidated

  

$

1,020,000

  

$

172,000

             

$

142,000

(A)

    

$

1,050,000

    

  

             


    

Reserve deducted from assets acquired in connection with claim settlements:

                                          

Registrant—None

                                          

Consolidated

  

$

2,192,000

         

$

319,000

 

    

$

1,410,000

(D)

    

$

1,101,000

    

         


    


    

Reserve deducted from other assets:

                                          

Registrant—None

                                          

Consolidated

  

$

2,600,000

  

$

818,000

                        

$

3,418,000

    

  

                        

 

Note A—Amount represents accounts written off, net of recoveries.

 

Note B—Amount represents net $2,383,000 in purchase accounting adjustments

 

Note C—Amount represents claim payments, net of recoveries.

 

Note D—Amount represents elimination of reserve in connection with disposition and/or revaluation of the related asset.

 

 

64


 

SCHEDULE V

3 OF 3

 

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

VALUATION AND QUALIFYING ACCOUNTS

Year Ended December 31, 2000

 

Column A


  

Column B


  

Column C


      

Column D


      

Column E


         

Additions


                 

Description


  

Balance at

beginning

of period


  

Charged to

costs and

expenses


  

Charged

to other

accounts


      

Deductions

from

reserve


      

Balance

at end

of period


                  
                  
                  

Reserve deducted from accounts receivable:

                                          

Registrant—None

                                          

Consolidated

  

$

13,669,000

  

$

9,555,000

             

$

7,747,000

(A)

    

$

15,477,000

    

  

             


    

Reserve for title losses and other claims:

                                          

Registrant—None

                                          

Consolidated

  

$

273,724,000

  

$

141,632,000

  

$

3,471,000

(B)

    

$

134,220,000

(C)

    

$

284,607,000

    

  

  


    


    

Reserve deducted from loans receivable:

                                          

Registrant—None

                                          

Consolidated

  

$

905,000

  

$

108,000

             

$

(7,000

)(A)

    

$

1,020,000

    

  

             


    

Reserve deducted from assets acquired in connection with claim settlements:

                                          

Registrant—None

                                          

Consolidated

  

$

4,856,000

         

$

(2,471,000

)

    

$

193,000

(D)

    

$

2,192,000

    

  

  


    


    

Reserve deducted from other assets:

                                          

Registrant—None

                                          

Consolidated

  

$

2,059,000

  

$

561,000

             

$

20,000

(D)

    

$

2,600,000

    

  

             


    

 

Note A—Amount represents accounts written off, net of recoveries.

 

Note B—Amount represents net $1,000,000 in purchase accounting adjustments and $2,471,000 reclassification from the reserve for assets acquired in connection with claim settlements.

 

Note C—Amount represents claim payments, net of recoveries.

 

Note D—Amount represents elimination of reserve in connection with disposition and/or revaluation of the related asset.

 

65


 

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None

 

PART III

 

The information required by Items 10 through 13 of this report is set forth in the sections entitled “Election of Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Executive Compensation,” “Stock Option Grants and Exercises,” “Pension Plan,” “Supplemental Benefit Plan,” “Deferred Compensation Plan,” “Change of Control Arrangements,” “Directors’ Compensation,” “Compensation Committee Interlocks and Insider Participation,” “Report of the Compensation Committee on Executive Compensation,” “Comparative Cumulative Total Return to Shareholders,” “Who are the largest principal shareholders outside of management?,” “Security Ownership of Management” and “Transactions with Management and Others” in the Company’s definitive proxy statement, which sections are incorporated in this report and made a part hereof by reference. The definitive proxy statement will be filed no later than 120 days after the close of Registrant’s fiscal year.

 

66


 

PART IV

 

Item 14.    Controls and Procedures

 

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods. Within 90 days prior to the date of this report, the Company’s President and Chief Financial Officer evaluated, with the participation of the Company’s management, the effectiveness of the Company’s disclosure controls and procedures. Based on the evaluation, which disclosed no significant deficiencies or material weaknesses, the Company’s President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There were no other significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation.

 

Item 15.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

 

(a) 1. & 2.

 

Financial Statements and Financial Statement Schedules

   

The Financial Statements and Financial Statement Schedules filed as part of this report are listed in the accompanying index at page      in Item 8 of Part II of this report.

3.

 

Exhibits (Each management contract or compensatory plan or arrangement in which any director or named executive officer of The First American Corporation, as defined by Item 402(a)(3) of Regulation S-K (17 C.F.R. §229.402(a)(3)), participates that is included among the exhibits listed below is identified by an asterisk (*).)

   

(2)

  

Agreement and Plan of Merger, dated as of November 17, 1998, among The First American Financial Corporation, National Insurance Group, and Pea Soup Acquisition Corp., incorporated by reference herein from Exhibit 2.1 of Form 8-K filed by National Information Group on November 25, 1998.

   

(3)(a)

  

Restated Articles of Incorporation of The First American Financial Corporation dated July 14, 1998, incorporated by reference herein from Exhibit 3.1 of Amendment No. 1, dated July 28, 1998, to the Company’s Registration Statement No. 333-53681 on Form S-4.

   

(3)(b)

  

Certificate of Amendment of Restated Articles of Incorporation of The First American Financial Corporation dated April 23, 1999, incorporated by reference herein from Exhibit (3) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.

   

(3)(c)

  

Certificate of Amendment of Restated Articles of Incorporation of The First American Financial Corporation dated May 11, 2000, incorporated by reference herein from Exhibit 3.1 of Report on Form 8-K dated June 12, 2000.

   

(3)(d)

  

Bylaws of The First American Corporation, as amended, incorporated by reference herein from Exhibit (3)(d) of Annual Report on Form 10-K for the fiscal year ended December 31, 2000.

   

(4)(a)

  

Rights Agreement, dated as of October 23, 1997, incorporated by reference herein from Exhibit 4 of Registration Statement on Form 8-A dated November 7, 1997.

   

(4)(b)

  

Junior Subordinated Indenture, dated as of April 22, 1997, incorporated by reference herein from Exhibit (4.2) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.

   

(4)(c)

  

Form of New 8.50% Junior Subordinated Deferrable Interest Debenture, incorporated by reference herein from Exhibit 4.2 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997.

   

(4)(d)

  

Certificate of Trust of First American Capital Trust I, incorporated by reference herein from Exhibit 4.3 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997.

 

67


   

    (4)(e)

  

Amended and Restated Declaration of Trust of First American Capital Trust I dated as of April 22, 1997, incorporated by reference herein from Exhibit (4.3) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.

   

    (4)(f)

  

Form of New 8.50% Capital Security (Liquidation Amount $1,000 per Capital Security), incorporated by reference herein from Exhibit 4.6 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997.

   

    (4)(g)

  

Form of New Guarantee Agreement, incorporated by reference herein from Exhibit 4.7 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997.

   

    (4)(h)

  

Senior Indenture, dated as of April 7, 1998, between The First American Financial Corporation and Wilmington Trust Company as Trustee, incorporated by reference herein from Exhibit (4) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.

   

    (4)(i)

  

Registration Rights Agreement dated as of April 24, 2001, incorporated by reference herein from Exhibit 4.2 of Registration Statement No. 333-65216 on Form S-3 dated July 16, 2001.

   

    (4)(j)

  

Indenture dated as of April 24, 2001, incorporated by reference herein from Exhibit 4.3 of Registration Statement No. 333-65216 on Form S-3 dated July 16, 2001.

   

    (4)(k)

  

Form of Senior Convertible Debenture, incorporated by reference herein from Exhibit 4.4 of Registration Statement No. 333-65216 on Form S-3 dated July 16, 2001.

   

*(10)(a)

  

Description of Stock Bonus Plan, as amended, incorporated by reference herein from Exhibit (10)(a) of Annual Report on Form 10-K for the fiscal year ended December 31, 1992.

   

*(10)(b)

  

Executive Supplemental Benefit Plan dated April 10, 1986, and Amendment No. 1 thereto dated October 1, 1986, incorporated by reference herein from Exhibit (10)(b) of Annual Report on Form 10-K for the fiscal year ended December 31, 1988.

   

*(10)(c)

  

Amendment No. 2, dated March 22, 1990, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(c) of Annual Report on Form 10-K for the fiscal year ended December 31, 1989.

   

*(10)(d)

  

Amendment No. 3, dated July 7, 1998, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(d) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.

   

*(10)(e)

  

Amendment No. 4, dated March 22, 2000, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(c) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999.

   

*(10)(f)

  

Amendment No. 5, dated July 19, 2000, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(e) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

   

*(10)(g)

  

Management Supplemental Benefit Plan dated July 20, 1988, incorporated by reference herein from Exhibit (10) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.

   

*(10)(h)

  

Amendment No. 1, dated July 7, 1998, to Management Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(f) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.

   

*(10)(i)

  

Amendment No. 2, dated March 22, 2000, to Management Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(h) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999.

   

*(10)(j)

  

Amendment No. 3, dated July 19, 2000, to Management Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(f) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

   

*(10)(k)

  

Pension Restoration Plan (effective as of January 1, 1994), incorporated by reference herein from Exhibit (10)(c) of Annual Report on Form 10-K for the fiscal year ended December 31, 1996.

 

68


   

*(10)(l)

  

Amendment No. 1, dated July 19, 2000, to Pension Restoration Plan, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

   

*(10)(m)

  

Amendment No. 2, dated August 1, 2001, to Pension Restoration Plan, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.

   

*(10)(n)

  

1996 Stock Option Plan, incorporated by reference herein from Exhibit 4 of Registration Statement No. 333-19065 on Form S-8 dated December 30, 1996.

   

*(10)(o)

  

Amendment No. 1, dated February 26, 1998, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(i) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.

   

*(10)(p)

  

Amendment No. 2, dated June 22, 1998, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(j) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.

   

*(10)(q)

  

Amendment No. 3, dated July 7, 1998, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(k) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.

   

*(10)(r)

  

Amendment No. 4, dated April 22, 1999, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.

   

*(10)(s)

  

Amendment No. 5, dated February 29, 2000, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(o) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.

   

*(10)(t)

  

Amendment No. 6, dated July 19, 2000, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(b) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

   

*(10)(u)

  

Amendment No. 7, dated June 4, 2002, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.

   

*(10)(v)

  

Change in Control Agreement (Executive Form) dated November 12, 1999, incorporated by reference herein from Exhibit (10)(p) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999.

   

*(10)(w)

  

Change in Control Agreement (Management Form) dated November 12, 1999, incorporated by reference herein from Exhibit (10)(q) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999.

   

*(10)(x)

  

1997 Directors’ Stock Plan, incorporated by reference herein from Exhibit 4.1 of Registration Statement No. 333-41993 on Form S-8 dated December 11, 1997.

   

*(10)(y)

  

Amendment No. 1 to 1997 Directors’ Stock Plan, dated February 26, 1998, incorporated by reference herein from Exhibit (10)(m) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.

   

*(10)(z)

  

Amendment No. 2 to 1997 Directors’ Stock Plan, dated July 7, 1998, incorporated by reference herein from Exhibit (10)(n) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.

   

*(10)(aa)

  

Amendment No. 3, dated July 19, 2000, to 1997 Directors’ Stock Plan, incorporated by reference herein from Exhibit (10)(c) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

   

*(10)(bb)

  

The First American Financial Corporation Deferred Compensation Plan dated March 10, 2000, incorporated by reference herein from Exhibit (10)(v) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999.

 

69


   

*(10)(cc)

  

Amendment No. 1, dated July 19, 2000, to Deferred Compensation Plan, incorporated by reference herein from Exhibit (10)(d) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

   

*(10)(dd)

  

The First American Financial Corporation Deferred Compensation Plan Trust Agreement dated March 10, 2000, incorporated by reference herein from Exhibit (10)(w) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999.

   

  (10)(ee)

  

Contribution and Joint Venture Agreement By and Among The First American Financial Corporation and Experian Information Solutions, Inc., et al., dated November 30, 1997, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.

   

  (10)(ff)

  

Operating Agreement for First American Real Estate Solutions LLC, a California Limited Liability Company, By and Among First American Real Estate Information Services, Inc., and Experian Information Solutions, Inc., et al., dated November 30, 1997, incorporated by reference herein from Exhibit (10)(b) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.

   

  (10)(gg)

  

Data License Agreement dated November 30, 1997, incorporated by reference herein from Exhibit (10)(d) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.

   

  (10)(hh)

  

Reseller Services Agreement dated as of November 30, 1997, incorporated by reference herein from Exhibit (10)(g) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.

   

  (10)(ii)

  

Amendment to Reseller Services Agreement For Resales to Consumers, dated as of November 30, 1997, incorporated by reference herein from Exhibit (10)(h) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.

   

  (10)(jj)

  

Trademark License Agreement, dated as of November 30, 1997, incorporated by reference herein from Exhibit (10)(i) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.

   

  (10)(kk)

  

Credit Agreement dated as of October 12, 2001, incorporated by reference herein from Exhibit (10)(b) of Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.

   

  (10)(ll)

  

Master Lease Agreement dated as of December 27, 1999, between FATICO 1999 TRUST, as Lessor, and First American Title Insurance Company, as Lessee, incorporated by reference herein from Exhibit (10)(g) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

   

  (10)(mm)

  

Agreement of Amendment No. 1 to Master Lease Agreement and Equipment Schedule No. 1, dated as of May 5, 2000, incorporated by reference herein from Exhibit (10)(h) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

   

  (21)

  

Subsidiaries of the registrant.

   

  (23)

  

Consent of Independent Accountants.

   

  (99)(a)

  

Certificationby Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.

   

  (99)(b)

  

Certificationby Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

 

(b)    Reports on Form 8-K

 

During the last quarterof the period covered by this report, the Company filed a current report on Form 8-K dated October 23, 2002, reporting on the Company’s third quarter earnings.

 

70


 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

THE FIRST AMERICAN CORPORATION

(Registrant)

By

 

/s/    PARKER S. KENNEDY      


   

Parker S. Kennedy

President

(Principal Executive Officer)

Date: March 31, 2003

By

 

/s/    THOMAS A. KLEMENS        


   

Thomas A. Klemens

Senior Executive Vice President,

Chief Financial Officer

(Principal Financial Officer)

Date: March 31, 2003

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature


  

Title


 

Date


/s/    D. P. KENNEDY        


  

Chairman and Director

 

March 31, 2003

D. P. Kennedy

        

/s/    PARKER S. KENNEDY        


  

President and Director

 

March 31, 2003

Parker S. Kennedy

        

/s/    THOMAS A. KLEMENS        


  

Senior Executive Vice President,

 

March 31, 2003

Thomas A. Klemens

  

Chief Financial Officer

   

/s/    MAX O. VALDES        


  

Vice President

 

March 31, 2003

Max O. Valdes

  

(Principal Accounting Officer)

   

/s/    GARY J. BEBAN        


  

Director

 

March 8, 2003

Gary J. Beban

        

/s/    J. DAVID CHATHAM        


  

Director

 

March 5, 2003

J. David Chatham

        

/s/    WILLIAM G. DAVIS        


  

Director

 

March 10, 2003

William G. Davis

        

/s/    JAMES L. DOTI        


  

Director

 

March 31, 2003

James L. Doti

        

 

71


Signature


  

Title


 

Date


/s/    LEWIS W. DOUGLAS, JR.          


  

Director

 

March 31, 2003

Lewis W. Douglas, Jr.

        

/s/    PAUL B. FAY, JR.        


  

Director

 

March 5, 2003

Paul B. Fay, Jr.

        

/s/    FRANK O’BRYAN        


  

Director

 

March 31, 2003

Frank O’Bryan

        

/s/    ROSLYN B. PAYNE        


  

Director

 

March 5, 2003

Roslyn B. Payne

        

/s/    D. VAN SKILLING        


  

Director

 

March 31, 2003

D. Van Skilling

        

/s/    HERBERT B. TASKER        


  

Director

 

March 5, 2003

Herbert B. Tasker

        

/s/    VIRGINIA UEBERROTH        


  

Director

 

March 31, 2003

Virginia Ueberroth

        

 

 

72


 

CERTIFICATIONS

 

 

I, Parker S. Kennedy, certify that:

 

1.    I have reviewed this annual report on Form 10-K of The First American Corporation (“registrant”);

 

2.    Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3.    Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

 

4.    The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

b)    evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

c)    presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.    The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.    The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date:    March 31, 2003

 

/s/    PARKER S. KENNEDY

Parker S. Kennedy

President

 

 

73


CERTIFICATIONS

 

I, Thomas A. Klemens, certify that:

 

1.    I have reviewed this annual report on Form 10-K of The First American Corporation (“ registrant”);

 

2.    Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3.    Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

 

4.    The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

b)    evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

c)    presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.    The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.    The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date:    March 31, 2003

 

/s/    THOMAS A. KLEMENS            

Thomas A. Klemens

Senior Executive Vice President,

Chief Financial Officer

(Principal Financial Officer)

 

74


EXHIBIT INDEX

 

Exhibit No.


  

Description


    

Sequentially

Numbered

Page


  (2)

  

Agreement and Plan of Merger, dated as of November 17, 1998, among The First American Financial Corporation, National Insurance Group, and Pea Soup Acquisition Corp., incorporated by reference herein from Exhibit 2.1 of Form 8-K filed by National Information Group on November 25, 1998.

      

  (3)(a)

  

Restated Articles of Incorporation of The First American Financial Corporation dated July 14, 1998, incorporated by reference herein from Exhibit 3.1 of Amendment No. 1, dated July 28, 1998, to the Company’s Registration Statement No. 333-53681 on Form S-4.

      

  (3)(b)

  

Certificate of Amendment of Restated Articles of Incorporation of The First American Financial Corporation dated April 23, 1999, incorporated by reference herein from Exhibit (3) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.

      

  (3)(c)

  

Certificate of Amendment of Restated Articles of Incorporation of The First American Financial Corporation dated May 11, 2000, incorporated by reference herein from Exhibit 3.1 of Report on Form 8-K dated June 12, 2000.

      

  (3)(d)

  

Bylaws of The First American Corporation, as amended, incorporated by reference herein from Exhibit (3)(d) of Annual Report on Form 10-K for the fiscal year ended December 31, 2000.

      

  (4)(a)

  

Rights Agreement, dated as of October 23, 1997, incorporated by reference herein from Exhibit 4 of Registration Statement on Form 8-A dated November 7, 1997.

      

  (4)(b)

  

Junior Subordinated Indenture, dated as of April 22, 1997, incorporated by reference herein from Exhibit (4.2) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.

      

  (4)(c)

  

Form of New 8.50% Junior Subordinated Deferrable Interest Debenture, incorporated by reference herein from Exhibit 4.2 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997.

      

  (4)(d)

  

Certificate of Trust of First American Capital Trust I, incorporated by reference herein from Exhibit 4.3 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997.

      

  (4)(e)

  

Amended and Restated Declaration of Trust of First American Capital Trust I dated as of April 22, 1997, incorporated by reference herein from Exhibit (4.3) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.

      

  (4)(f)

  

Form of New 8.50% Capital Security (Liquidation Amount $1,000 per Capital Security), incorporated by reference herein from Exhibit 4.6 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997.

      

  (4)(g)

  

Form of New Guarantee Agreement, incorporated by reference herein from Exhibit 4.7 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997.

      

  (4)(h)

  

Senior Indenture, dated as of April 7, 1998, between The First American Financial Corporation and Wilmington Trust Company as Trustee, incorporated by reference herein from Exhibit (4) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.

      

  (4)(i)

  

Registration Rights Agreement dated as of April 24, 2001, incorporated by reference herein from Exhibit 4.2 of Registration Statement No. 333-65216 on Form S-3 dated July 16, 2001.

      

 

75


Exhibit No.


  

Description


    

Sequentially

Numbered

Page


  (4)(j)

  

Indenture dated as of April 24, 2001, incorporated by reference herein from Exhibit 4.3 of Registration Statement No. 333-65216 on Form S-3 dated July 16, 2001.

      

  (4)(k)

  

Form of Senior Convertible Debenture, incorporated by reference herein from Exhibit 4.4 of Registration Statement No. 333-65216 on Form S-3 dated July 16, 2001.

      

*(10)(a)

  

Description of Stock Bonus Plan, as amended, incorporated by reference herein from Exhibit (10)(a) of Annual Report on Form 10-K for the fiscal year ended December 31, 1992.

      

*(10)(b)

  

Executive Supplemental Benefit Plan dated April 10, 1986, and Amendment No. 1 thereto dated October 1, 1986, incorporated by reference herein from Exhibit (10)(b) of Annual Report on Form 10-K for the fiscal year ended December 31, 1988.

      

*(10)(c)

  

Amendment No. 2, dated March 22, 1990, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(c) of Annual Report on Form 10-K for the fiscal year ended December 31, 1989.

      

*(10)(d)

  

Amendment No. 3, dated July 7, 1998, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(d) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.

      

*(10)(e)

  

Amendment No. 4, dated March 22, 2000, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(c) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999.

      

*(10)(f)

  

Amendment No. 5, dated July 19, 2000, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(e) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

      

*(10)(g)

  

Management Supplemental Benefit Plan dated July 20, 1988, incorporated by reference herein from Exhibit (10) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.

      

*(10)(h)

  

Amendment No. 1, dated July 7, 1998, to Management Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(f) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.

      

*(10)(i)

  

Amendment No. 2, dated March 22, 2000, to Management Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(h) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999.

      

*(10)(j)

  

Amendment No. 3, dated July 19, 2000, to Management Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(f) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

      

*(10)(k)

  

Pension Restoration Plan (effective as of January 1, 1994), incorporated by reference herein from Exhibit (10)(c) of Annual Report on Form 10-K for the fiscal year ended December 31, 1996.

      

*(10)(l)

  

Amendment No. 1, dated July 19, 2000, to Pension Restoration Plan, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

      

*(10)(m)

  

Amendment No. 2, dated August 1, 2001, to Pension Restoration Plan, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.

      

 

76


Exhibit No.


  

Description


    

Sequentially

Numbered

Page


*(10)(n)

  

1996 Stock Option Plan, incorporated by reference herein from Exhibit 4 of Registration Statement No. 333-19065 on Form S-8 dated December 30, 1996.

      

*(10)(o)

  

Amendment No. 1, dated February 26, 1998, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(i) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.

      

*(10)(p)

  

Amendment No. 2, dated June 22, 1998, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(j) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.

      

*(10)(q)

  

Amendment No. 3, dated July 7, 1998, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(k) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.

      

*(10)(r)

  

Amendment No. 4, dated April 22, 1999, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.

      

*(10)(s)

  

Amendment No. 5, dated February 29, 2000, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(o) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.

      

*(10)(t)

  

Amendment No. 6, dated July 19, 2000, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(b) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

      

*(10)(u)

  

Amendment No. 7, dated June 4, 2002, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for quarter ended June 30, 2002.

      

*(10)(v)

  

Change in Control Agreement (Executive Form) dated November 12, 1999, incorporated by reference herein from Exhibit (10)(p) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999.

      

*(10)(w)

  

Change in Control Agreement (Management Form) dated November 12, 1999, incorporated by reference herein from Exhibit (10)(q) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999.

      

*(10)(x)

  

1997 Directors’ Stock Plan, incorporated by reference herein from Exhibit 4.1 of Registration Statement No. 333-41993 on Form S-8 dated December 11, 1997.

      

*(10)(y)

  

Amendment No. 1 to 1997 Directors’ Stock Plan, dated February 26, 1998, incorporated by reference herein from Exhibit (10)(m) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.

      

*(10)(z)

  

Amendment No. 2 to 1997 Directors’ Stock Plan, dated July 7, 1998, incorporated by reference herein from Exhibit (10)(n) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.

      

*(10)(aa)

  

Amendment No. 3, dated July 19, 2000, to 1997 Directors’ Stock Plan, incorporated by reference herein from Exhibit (10)(c) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

      

*(10)(bb)

  

The First American Financial Corporation Deferred Compensation Plan dated March 10, 2000, incorporated by reference herein from Exhibit (10)(v) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999.

      

 

77


Exhibit No.


  

Description


    

Sequentially

Numbered

Page


*(10)(cc)

  

Amendment No. 1, dated July 19, 2000, to Deferred Compensation Plan, incorporated by reference herein from Exhibit (10)(d) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

      

*(10)(dd)

  

The First American Financial Corporation Deferred Compensation Plan Trust Agreement dated March 10, 2000, incorporated by reference herein from Exhibit (10)(w) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999.

      

  (10)(ee)

  

Contribution and Joint Venture Agreement By and Among The First American Financial Corporation and Experian Information Solutions, Inc., et al., dated November 30, 1997, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.

      

  (10)(ff)

  

Operating Agreement for First American Real Estate Solutions LLC, a California Limited Liability Company, By and Among First American Real Estate Information Services, Inc., and Experian Information Solutions, Inc., et al., dated November 30, 1997, incorporated by reference herein from Exhibit (10)(b) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.

      

  (10)(gg)

  

Data License Agreement dated November 30, 1997, incorporated by reference herein from Exhibit (10)(d) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.

      

  (10)(hh)

  

Reseller Services Agreement dated as of November 30, 1997, incorporated by reference herein from Exhibit (10)(g) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.

      

  (10)(ii)

  

Amendment to Reseller Services Agreement For Resales to Consumers, dated as of November 30, 1997, incorporated by reference herein from Exhibit (10)(h) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.

      

  (10)(jj)

  

Trademark License Agreement, dated as of November 30, 1997, incorporated by reference herein from Exhibit (10)(i) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.

      

  (10)(kk)

  

Credit Agreement dated as of October 12, 2001, incorporated by reference herein from Exhibit (10)(b) of Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.

      

  (10)(ll)

  

Master Lease Agreement dated as of December 27, 1999, between FATICO 1999 TRUST, as Lessor, and First American Title Insurance Company, as Lessee, incorporated by reference herein from Exhibit (10)(g) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

      

  (10)(mm)

  

Agreement of Amendment No. 1 to Master Lease Agreement and Equipment Schedule No. 1, dated as of May 5, 2000, incorporated by reference herein from Exhibit (10)(h) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

      

  (21)

  

Subsidiaries of the registrant.

      

  (23)

  

Consent of Independent Accountants.

      

 (99)(a)

  

Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.

      

 (99)(b)

  

Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

      

 

78